Green bonds attract higher subscription rates, better secondary pricing than conventional ones: CBI

MARKET demand and pricing of green bonds in the first half of 2022 remained stronger than their plain vanilla equivalents despite a drop in issuance volumes, according to a report from Climate Bonds Initiative (CBI).

Green bond offerings denominated in euros and the US dollar were shown to have higher subscription rates than their conventional bond equivalents, according to CBI, whose green bond standards are widely referenced by the sustainable finance industry.

The report also found that, after issuance, green bonds also commanded higher prices on the secondary market than their conventional counterparts, suggesting positive spread compressions against their vanilla equivalents.

These findings were based on a sample of 93 euro-denominated and US dollar-denominated green bonds with an issue size of at least US$500 million that were priced between January and June this year. The total issuance volume of these 93 bonds added up to US$93.3 billion.

These issuances made up 40 per cent of the US$236 billion of green bonds added to CBI’s database in the first half of 2022 as a whole.

Limiting the analysis to euro-denominated and US-dollar denominated green bonds was because CBI wanted to capture the most liquid portion of the green bond market.

According to the report, euro-denominated green bonds were 3.1 times oversubscribed, compared to 2.4 times for their vanilla equivalents, while those issued in US dollars were 3.8 times oversubscribed, as opposed to 2.7 times for the equivalent conventional bonds.

The spread compression for Euro-denominated bonds averaged 18.2 basis points (bps) for green bonds, and 16.4 bps for conventional bonds.

Investors who described themselves as green investors were, on average, allocated 65 per cent of the deal.

Issuers in this study noted that the green label enabled them to issue, despite challenging times for debt issuance given the war in Ukraine and rising interest rates. It also helped to attract a more diversified order book and subsequently better pricing outcomes than may have been possible otherwise, the report stated.

CBI also found relatively low incidence of a green premium, or “greenium”, in the first half of this year. Greenium refers to green bonds price at lower yields compared to conventional bonds.

The report stated that 20 per cent out of a sample of 50 non-sovereign issuers received a pricing benefit, as investors are being more cautious and are happy to sit on cash. In some cases, issuers are offering investors new-issue yields that are higher than market to gain access to capital.

“The relatively low incidence of greenium in H1 2022 is not bad news for the green bond market specifically, and rather reflects investors exercising extreme caution due to the uncertain geopolitical and macroeconomic conditions,” read the report.

Sustainability-linked bonds

Unlike green bonds which have a more mature pricing mechanism, a progress report by Sustainable Fitch found that the market for sustainability-linked bonds (SLB), which have only been in existence for about 3 years, does not reflect an ability for tailored pricing thus far.

While proceeds for green bonds may only be used for eligible green projects, SLBs allow issuers to use bond proceeds for general corporate purposes. However, SLBs contain mechanisms that reward or penalise issuers depending on their ability to meet agreed-upon sustainability targets, typically via step-ups or step-downs in the bonds’ coupons.

The Sustainable Fitch report, which was published on Thursday (Sep 22), noted that the convention in the SLB market has been to step up an issuer’s coupon by 25 bps, regardless of the original coupon, credit quality or scale of the issuer’s operations. This pricing convention was set after Italian energy group Enel issued the world’s first SLB in 2019, which came with a one-time step-up of 25 bps if they failed to meet their sustainability targets.

The step-ups do not seem to be structured based on the ambition of the targets or on the costs required to achieve them.

“We do not see the need for mass consolidation at a specific step-up level. Step-up rates should be further differentiated to account for variations in the financial, operational and sustainability profiles of issuers, and improve transparency for investors,” Sustainable Fitch wrote.