Wind turbines operate near farmland in this aerial photo at the Botievo wind farm in Ukraine (Photographer: Vincent Mundy/Bloomberg)  

Everyone Wants to See Green in Bonds

(Bloomberg) -- Green bonds.

How do you decide if an investment is socially responsible? Well, I mean, how do you decide if an investment is good? You do research, you talk to the issuer, you figure out your list of criteria, and you do your best to determine if the investment meets the criteria. 

But this is a lot of work and you may not have time for it. Especially if you are a bond investor. Bonds are meant to be boring safe investments, and so in fact many bond investors outsource even the question “is this bond good?” to ratings agencies for a letter grade: AAA, good, C, not so good. Similarly it makes complete sense that if you would want to invest in socially responsible—or environmentally sound, or whatever—bonds, you would also want someone else to do the work of figuring out what that means and which bonds fit the requirements. And as environmentally conscious investing becomes more popular, a business has developed:

Sales of green bonds rose 9.4 per cent year on year in the first quarter of 2018 to $29.6bn, according to data from law firm Linklaters, fuelling concern that more scrutiny is needed of the companies that judge how green the bonds are. Some industry observers argue that these third-party verifiers should be subject to regulation in the way that credit rating agencies are in the established debt markets.

Third-party verifiers include credit rating agencies and accounting firms, but independent environmental consultancies and research institutes have also become involved.

There are complaints:

Sean Kidney, chief executive of the Climate Bonds Initiative, a UK-based non-profit organisation, pointed to a concern for investors in such situations: “Because the [assessment] fees are paid by the issuer of the bond, you have the same potential conflict of interest [with third-party verifiers] as we had with the credit rating agencies before the financial crisis.”

So, yes, it is the same conflict of interest, but be careful about what the conflict is. It is just possible that the conflict is that institutional money managers trust third-party verifiers to tell them which bonds are green and which aren’t, and are shocked to learn that the verifiers are paid by the bond issuers and may have incentives to rate bonds as green that are actually brownish. (By the way if I were one of those verifiers I would obviously use a Benjamin Moore color scale in my ratings, with like Emerald Isle for the greenest bonds, Spring Fresh for still very environmentally conscious ones, Hint of Mint for fairly decent ones, and, like, Desert Beach for terrible polluters.)

But there is another plausible alternative, which is that the bond managers want to be able to buy a lot of bonds and say that they are green, and the issuers want to be able to sell a lot of bonds and say that they are green, and the verifiers are helping both sides get what they want, which is a plentiful selection of certified green bonds. After all, if you are an environmentally conscious bond manager, and you are so environmentally conscious that no bonds are good enough for you, you might be an excellent environmentalist but you will not be much of a bond manager. Both sides of the market are biased toward prefering generous ratings. Investors would prefer to fool themselves. (This seems fairly clearly to have been the actual model of credit ratings in the financial crisis, where investors wanted AAA ratings to meet capital and mandate requirements, not because they thought AAA ratings guaranteed safety.)  


Although third-party assessors have grown in importance in recent years, relying on them is “a pretty weak way to manage clients’ money”, said Vishal Khanduja, green bond fund portfolio manager at Calvert Research and Management, a subsidiary of US asset manager Eaton Vance.

Instead, investors should do their own environmental due diligence, he believes.

Well, yes, of course, but relying on third-party assessors to rate creditworthiness is pretty weak too. The point is that lots of investors aren’t going to do their own work on every issue, and some won’t do their own work on any issue, and so there is going to be a market for third parties to do that work for them. And that market will reward ratings that are commercially palatable, probably more so than ratings that are “correct.”

Anyway the article mentions calls for regulation of environmental bond-raters, which seems like overkill. Surely there is a market solution here? If you worry that some environmental raters aren’t doing a good job, then why not hire someone to be a rater of environmental raters? 


We have talked a lot about the nifty trade between Blackstone Group LP’s GSO credit fund and homebuilder Hovnanian Enterprises Inc. The basic idea is that GSO is giving Hovnanian some attractive new financing in exchange for Hovnanian agreeing to do a quickie weird default on its debt; GSO, which owns a lot of credit-default swaps on that debt, stands to make money when the default triggers the CDS. But since CDS payouts depend on the value of the underlying bonds, and since Hovnanian’s bonds mostly trade above par, and since a quickie weird default wouldn’t change that, Hovnanian also agreed to issue special weird new bonds that would trade well below par and make the CDS more valuable. Specifically, Hovnanian agreed to refinance some existing bonds into two series of new bonds, one of which pays 13.5 percent interest and is now worth about 115 cents on the dollar and one of which pays 5 percent and is now worth about 40 cents on the dollar. Investors who participated in the refinancing got some of each bond; the good bond rewarded them for their participation while the bad bond will trigger a big CDS payout. 

This was so clever that Hovnanian tried to double down on it, proposing to exchange some more existing bonds for even weirder new bonds—and only bad ones. I wrote last month about that exchange:

For every $100 face amount of existing 10 or 10.5 percent four- or six-year bonds, you can get $125 face amount of new 3 percent 29-year bonds. By my casual math those bonds should trade for less than 30 cents on the dollar, giving a package worth maybe 35 cents on the dollar, which seems low given that those existing bonds trade at something like 103 cents on the dollar. This does not seem like a great deal for bondholders. "Such an offering could only be designed for one type of investor: those who, like GSO, have bought insurance against a default," notes Sridhar Natarajan of Bloomberg News. Even for them, I mean, I dunno, you exchange a $103 bond for $35 worth of stuff and get a $70 payout on your CDS; it's not bad, but it's not a giant windfall. Perhaps I am missing something.

I guess everyone else was missing it too. (The deal was quickly amended to offer $140 face amount of new bonds for each $100 of old bonds, but that is still pretty low.) This morning Hovnanian announced that it was giving up on this second exchange offer, because it was unable to get its minimum requirement of $50 million (out of $840 million) of old bonds to tender in the exchange offer. This may be because, since the second offer was launched, there have been some ominous noises about whether the trade is somehow manipulative or invalid. But it may just be because the bonds are not especially attractive. It turns out that using CDS to subsidize refinancing isn’t a limitless source of free money. Much as I would like it if investors would buy these weird new bonds purely for aesthetic, or comedic, reasons, it turns out that they want to get paid too.

What are research analysts for? 

Here is a story about how research analysts who are nice to companies get to ask questions on earnings calls, while research analysts who are mean to companies—for instance, by writing mean things about them or putting Sell ratings on their stock—sometimes don’t get to ask questions

“There are definitely management teams that would prefer that analysts are just cheerleaders,” said David Amsellem, an analyst at Piper Jaffray & Co. “They just don’t seem to respect the independence of analysts.”

We talk from time to time around here about the function of research analysts. There is a popular view that the function of research analysts is to slap Buy ratings on stocks you should buy, Sell ratings on stocks you should sell, and Hold ratings on, I don’t know, the other stocks. On this view, the worst thing an analyst could do would be to rate a stock in a way that does not align with her true feelings.

My view is that this is naive, and that the function of research analysts is mostly to help institutional investors understand the companies they cover, and that the Buy/Hold/Sell ratings are the least important part of that help. We’ve talked about it before in the context of corporate access: If you are an institutional investor, a useful thing that a research analyst can do for you is set up meetings with corporate managers, and if the analyst can’t do that because she writes mean things about the managers, then she will be less useful to you. And if you are an institutional investor who does your own work and comes up with your own investment theses based on careful research, you might quite reasonably care more about the meetings than you do about the Buy/Hold/Sell rating at the top of her research report. Deciding what stocks to buy and sell is your job; her job is to help you understand the companies so you can make that decision.

But there are lots of similar cases. Why do analysts ask questions on earnings calls? Mostly to show off and have something to do during otherwise boring calls, probably, but also a little bit because they want to know the answers. Asking the questions, and getting the answers, helps the analysts understand the companies, which helps them write research reports (and do client phone calls, etc.) that help their clients understand the companies. Which is what the clients want. An analyst who reads public news articles about a company, writes mean things about it, and says “Sell” is less useful to clients than an analyst who talks to the company’s managers, develops an informed view based on detailed conversations with them, and then maybe tones down the negative stuff in print. 

Every time I write about this, someone emails to say “shouldn’t they just get rid of the Buy/Hold/Sell ratings then?” And … probably? The big problem in research seems to be that people confuse its secondary trivial function (ratings) with its primary useful function (information), and a good way to clear up that confusion would be to get rid of the secondary function. But I guess the ratings do help market the research.

The art world.

Billionaire bond-fund manager Bill Gross has written—in an Investment Outlook, of course—about his wife Sue’s skills as an art forger:

She likes to paint replicas of some of the famous pieces, using an overhead projector to copy the outlines and then just sort of fill in the spaces. “Why spend $20 million?” she’d say – “I can paint that one for $75”, and I must admit that one fabulous Picasso with signature “Sue”, heads the fireplace mantle in our bedroom.

Well, using the projector undermines the achievement a bit, but still it is nice to have a hobby. But now that the Grosses are divorcing, Sue has apparently been using her artistic skills against Bill:

Sue Gross didn’t wait until she and Wall Street titan Bill Gross had finalized their split, swapping out a 1932 Pablo Picasso painting entitled “Le Repos” hanging in their bedroom with her own rendering.

The original is expected to fetch as much as $35 million at Sotheby’s Monday evening.

The painting, which depicts ­Picasso lover Marie-Thérèse Walter, had belonged to them jointly. But a coin flip in August 2017 — amid the couple’s divorce proceedings — awarded Sue full custody of Picasso’s depiction of his sleeping mistress, which the couple had owned since 2006.

After the flip, Bill Gross tried to make arrangements for the piece to be transferred from his ­Laguna Beach, Calif., house to his ex-wife, sources told The Post.

But the ex-Mrs. Gross said that was unnecessary — she already had taken the real thing.

Okay first of all he wrote an investment letter about how he had a fake Picasso hanging in his house, so it is a little weird that he forgot? Second, I have to say, if I were very rich one of my hobbies would definitely be collecting financial art. I have mentioned previously my fondness for Sarah Meyohas’s stock-price-chart paintings, and I’d bid whatever it took to get my hands on Sue Gross’s “Le Repos.” I think I’d prefer it to Picasso’s. (Picasso’s goes on sale tonight and is estimated at $25 to $35 million.) At the end of the day there is nothing all that interesting about the fact that Picasso painted some Picassos; what else would he have painted? The fact that the wife of a billionaire bond-fund manager painted a Picasso, and then used it as part of a ploy in their divorce proceedings: That is interesting. “The Cervantes text and the Menard text are verbally identical, but the second is almost infinitely richer,” says Borges. If Bill Gross still owns it (does the coin flip cover both paintings?), I wonder if he would sell it to me for $75.

How’s Steve Eisman doing?

I wish Neuberger Berman Group’s Steve Eisman a long and happy life, but I like to imagine that one day in the very distant future, when he is on his deathbed, he will gather his family around him and have a quiet moment with a grown grandchild.

Steve Eisman: Spend more time with your family, Chip; it is the only thing that matters.

Grandchild: [misty-eyed] Okay Grandpa, I will.

Financial journalist: You should listen to him; he shorted subprime in 2008.

Grandchild: Why are you here.

Anyway Eisman went on television again and recommended shorting Deutsche Bank AG.

Hedge-fund closures.

Sad news: Outsider Records & Hedge Fund, the Maplewood, NJ record store that was also supposed to be a hedge fund, and which we discussed back in March, has closed. I guess now you will have to get your vintage vinyl at … Point72? Sure let’s say Point72.

Things happen.

Xerox Drops Fujifilm Merger Plan, Strikes a Deal With Activists. “Morale is actually pretty good” at Deutsche Bank; “people are encouraged by the state and the pace of change.” Federal Sports-Wagering Ban Overturned by U.S. Supreme Court. How a Web of Slip-and-Fall Cases Puts a New Spin on an Old-Fashioned Scheme. Goldman Sachs eyes Germany for expansion of Marcus. Tesla’s Executive Exodus Is Making It Tougher for Musk to ‘Burn’ Short Sellers. China's Stock Market Is About to Burst Onto the Global Stage. Anbang: the downfall of China’s global dealmaker. Bankers With Broken English Are Luxembourg's Brexit Bottleneck. Wall Street Is Getting in on the House Flipping Game. Landmark bond sales hit by emerging markets downturn. Cities Recycle Their Amazon Pitches to Attract New Business. Wall Street is moving to … Hudson Yards? “Markle will be the first gig-economy aristocrat.” The Owl Thieves of Sweden. 

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To contact the author of this story: Matt Levine at

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