Schroders Loaded Up on Sustainable Debt Dumped in Virus Sell-Off

(Bloomberg) -- Schroders Plc snapped up debt earmarked for environmental and social projects during the global markets rout in March. The asset manager is growing a new European fund focused on sustainable debt, expecting an increase in issuance from banks, real estate, infrastructure and health care.

Green bonds sold off just as much as other debt during the panic caused by economic shutdown and oil’s collapse, creating an opportunity to buy, according to Saida Eggerstedt, head of sustainable credit at Schroders, which oversees about $660 billion in assets globally.

“All bonds were sold off or they were marked down and I utilized this to increase the quota of green bonds in the fund,” said Frankfurt-based Eggerstedt in a May 6 interview.

Bonds earmarked for sustainable purposes had been expected to be more resilient in a downturn, and investors prefer not to sell them. However, the swift March slump followed unprecedented economic lockdowns and an oil collapse, leaving portfolio managers scrambling for liquidity. The Bloomberg Barclays Euro Green Bond Index fell as much as 7%, close to the 7.3% drop seen in the corporate euro debt benchmark, according to data compiled by Bloomberg.

Schroders dived in to purchase CPI Property Group SA’s 1.625% bonds due 2027, Prologis Euro Finance’s 0.375% bonds due 2028, Digital Dutch Finco BV’s 1.5% bonds maturing 2030 and Klabin Austria’s 7.0% bonds due 2049, among other debt, said Eggerstedt. Even though markets have since pared losses, there may still be opportunities in cyclical names, especially if the recession isn’t deep. she said.

“We have to find names which have been beaten up, maybe fallen angels, that have good management and a long-term business plan that it can whether the sell off,” said Eggerstedt.

Schroders Loaded Up on Sustainable Debt Dumped in Virus Sell-Off

Schroders launched a new sustainable European credit fund in December with about 25 million euros in capital and plans to expand it substantially, said Eggerstedt, who joined the firm in August. Green bonds make up about 30% of the sustainable assets in the fund, she said.

“There is no limit to how big the fund can be,” said Eggerstedt. “The crisis has shown us that there is a need for social projects which need financing. You also need energy efficiency and efficiency in all aspects of life, which means there will be more green bonds.”

Schroders is hoping its performance track record will lure more investors into the fund as the broader sustainable market advances. That may, however, take a while because “many investors think sustainability and performance do not go together,” said Eggerstedt.

Schroders is also buying newly issued green and social debt from companies and governments. It bought Analog Devices Inc.’s $400 million green debt in early April, NXP Semiconductors NV’s offering that included a 10-year green tranche, Madrid’s 700 million euro green debt late last month, and a social bond from Cassa Depositi e Prestiti SpA, a development bank in Italy.

Going forward, more banks are likely to issue social bonds given capital relief they are getting from regulators in Europe, as well as incentives to lend to small and medium-sized companies, said Eggerstedt. Real estate, infrastructure, automobile and health care sectors may also be active issuance sectors for sustainable bonds once companies have better visibility of capital expenditures.

“This is the time where you really show how you take care of the society as a corporate,” she said. “The cement sector and all kinds of basic materials need a lot of innovation to reduce their carbon emissions -- those sectors could issue debt.”

©2020 Bloomberg L.P.

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