1H15 Green Bond Update

Transcription

1 DATA INSIGHT REPORT cleanenergypipeline.com 1H15 Green Bond Update BNY Mellon 1

2 This Data Insight Report analyses global green bond issuances in the first half of 2015 (1H15). The analysis is based on deals tracked in Clean Energy Pipeline s green bond deal database. Green bond issuances totalled $19.8 billion in 1H15, exactly the same as the $19.8 billion issued in the corresponding period of Green bond issuances in 1H15 were 32% higher than the entirety of 2013 ($15 billion) and triple the $5.9 billion issued in While the volume of green bonds issued is flat, the number of issuances increased significantly - 77 green bonds were placed in 1H15, a 45% increase on the 53 issued in 1H14. This impressive growth is due to an increase of issuances by US local governments/municipalities and US and Asian investment/ commercial banks. Deal volumes were flat in 1H15 due to a lack of large transactions. Only two $1 billion+ offerings took place in 1H15 Japanese car maker Toyota s $1.25 billion green ABS issue in June 2015 and Dutch transmission operator TenneT s Eur1 billion ($1.1 billion) green bond issue in May In contrast, nine green bonds in excess of $1 billion were placed in European and North American organisations dominate the global green bond market, issuing $10.2 billion (51% of total issuances) and $6.8 billion (35%) of green bonds in 1H15 respectively. European and North American issuers issued 35 (45% of total issuances) and 33 (43%) green bonds respectively in 1H15. Green bond issuances H Deal value ($ billion) Number of deals Multilateral financial organisations Governments/Municipalities Corporates Investment/commercial banks Project bonds Asset-backed securities Number of deals 2 BNY Mellon

3 Green bond issuances 1H15 Total deal value by issuer nationality Green bond issuances 1H15 Total number of deals by issuer nationality 11% 3% 10% 1% 45% 51% 35% 43% Europe North America Asia Pacific Rest of the world Europe North America Asia Pacific Rest of the world Who is issuing green bonds? Until 2012 issuers were almost exclusively multilateral financial organisations such as the World Bank, the European Investment Bank and the Asian Development Bank. More recently, corporates, local governments/municipalities and investment/commercial banks also started to issue green bonds and now enjoy a significant market share. Government entities During 1H15, government entities (comprising multilateral financial organisations and local governments/municipalities) raised $9.4 billion through 44 green bond placements, a 7% increase on the $8.8 billion issued in 1H14. This accounted for 45% of the total value of green bond issuances. Multilateral financial organisations were the most prolific issuers of green bonds during 1H15. The European Investment Bank raised over $1.3 billion through four issuances of its Climate Awareness Bonds, the World Bank and its group members completed ten offerings totalling $823 million, and Dutch development bank FMO NV secured Eur500 million ($530 million) by issuing 7-year Sustainability Bonds in April This is FMO s second Sustainability Bond issuance and its first 7-year transaction. The funding raised will be used by the banks to finance environmental and socially responsible investments. Notable green bond issuances by local governments and municipalities all took place in Europe. These include placements by Transport for London ( 400 million/$598 million), Ile-De-France Regional Council (Eur500 million/$529 million), Kommunalbanken Norway ($500 million) and Swedish Export Credit Corporation ($500 million). 1H15 was also notable for the emergence of US local governments/municipalities, which raised $1.9 billion from 17 green bond placements a significant increase on the mere $100 million in 1H14. The most active green bond issuers include the Iowa Finance Authority (issuing $322 million), the State Government of Connecticut ($250 million), Massachusetts State Clean Water ($228 million) and the Chicago Metropolitan Water Reclamation District ($225 million). BNY Mellon 3

4 Green bond issuances by type 1H15 vs 1H14 1H14: $19.8 billion, 53 deals 42% 15% 27% 7% 5% 4% 1H15: $19.8 billion, 77 deals 25% 20% 21% 16% 11% 8% Asset-backed securities Project bonds Investment/commercial banks Corporates Governments/Municipalities Multilateral financial organisations Corporates Corporates (comprising utility/energy and non-energy companies) raised $4.2 billion through 16 green bond placements in 1H15, accounting for 21% of the total volume issued. This represented a 49% decrease on the $8.2 billion issued in 1H14. The significant decrease was due to the absence of large placements. No $1 billion+ deals took place in 1H15. This should not be interpreted as a sign that the corporate green bond market is slowing down. In fact, 1H15 was notable for a significant number of companies entering the green bond market for the first time. These include US-based SunEdison s yieldco vehicle TerraForm Power, Danish wind turbine maker Vestas, Brazilian food company BRF SA, Swedish power company Fortum Värme Samägt med Stockholms Stad and Chinese solar developer United Photovoltaics. During 1H15, utility/energy companies raised $2 billion through eight green bond offerings, a significant decrease on the $5.3 billion issued in 1H14. Deal activity was underpinned by several mid-size transactions by TerraForm Power ($800 million), Vestas Wind Systems ($559 million) and Rapid Holding GmbH ($455 million). TerraForm Power will use the $800 million proceeds from the 5.875% senior notes due in 2023 to partially fund the $2.4 billion acquisition of US-based renewable energy developer First Wind. Similarly, Rapid Holding will use the Eur400 million proceeds to partly fund the Eur1 billion buyout of German wind turbine maker Senvion from Indian wind turbine maker Suzlon. Rapid Holding, which completed its five-year noncalled green bond issuance in April 2015, is a vehicle formed by private equity fund Centerbridge Partners to take over Senvion in late Diversifying and optimising its funding structure in favour of longer term funding at attractive terms was Vestas rationale for its 2.75% seven-year green bond placement totalling Eur500 million ($559 million) in March Non-energy companies raised $2.2 billion through eight green bond placements in 1H15, a 31% decrease on the $2.9 billion issued in 1H14. The largest deal was Brazilian food company BRF SA Eur500 million ($546 million) issuance in May 2015 of 7-year 2.75% senior unsecured notes to fund its Green Projects Portfolio. In April 2015, Parisheadquartered commercial property investor Unibail- Rodamco SE also issued Eur500 million ($541 million) 10-year green bonds with an annual coupon rate of 1%. It is the second green bond the company has placed following its Eur750 million green bond in February 2014, which had a maturity of ten years and an annual coupon rate of 2.5%. Banks Investment/commercial banks issued $3.2 billion of green bonds through ten placements in 1H15, accounting for 16% of the total value of bonds issued. By comparison, only three transactions totalling $0.5 billion completed in 1H14. This impressive increase was underpinned by a number of large offerings by new market entrants such as ABN AMRO, ANZ, Berlin Hyp, Morgan Stanley, National Development and YES Bank. 4 BNY Mellon

5 The largest transaction was Bank of America s issue of a $600 million green bond in May This is the second green bond issuance by Bank of America following its $500 million debut issue in November Morgan Stanley, another US bank, closed its first ever green bond placement in June The $500 million proceeds will be allocated to various renewable energy and energy efficiency projects including the 150MW Route 66 and the 207MW Rattlesnake wind farms, both under construction in Texas. Notable issuers also include German real estate financing company Berlin Hyp and Dutch bank ABN AMRO, who each raised Eur500 million ($545 million) in March and May 2015 respectively. Berlin Hyp will use the proceeds to finance green buildings in its mortgage cover pool while ABN AMRO will use the proceeds to invest in mortgages of energy-efficient homes, loans for residential solar panel installations and sustainable commercial properties. Despite their smaller deal size, banks in the Asia Pacific such as ANZ ($469 million), Yes Bank ($162 million) and National Australia Bank ($158 million) also successfully issued their first ever green bonds in 1H15. The proceeds will be allocated to various green projects. Project bonds Project bonds (used to finance renewable energy or energy efficiency projects) totalled $2.1 billion in 1H15, nearly triple the $723 million issued in 1H14. The largest placement was by Dutch transmission operator TenneT Holding, which raised Eur1 billion ($1.1 billion) in May 2015 to finance the DolWin 1, 2 and 3 offshore wind transmission line projects in Germany. TenneT Holding is the first non-financial Dutch company to launch a euro-denominated green bond. The bond, which was 2x oversubscribed, may eventually evolve into a multi-billion euro green investment opportunity to finance Dutch and German offshore wind projects. Another transmission project that tapped the green bond market was the Wind Energy Transmission Texas (WETT) project in the US. Canadian investment fund Brookfield Asset Management and Spanish infrastructure developer Isolux raised $645 million through the placement of 20-year green bonds to refinance the facility in January This transaction is Isolux Infrastructure s first US-market issuance of bonds to finance transmission line assets. Also in January 2015, Macquarie raised 190 million ($285 million) of 6.75% senior secured notes due 2020 to refinance a 174MW portfolio of five biomass-fired power plants and 68 landfill gas generating engines across 25 sites in the UK. Green asset-backed securities Green asset-backed securities (ABS) (bond or note issuances secured by a portfolio of receivables such as loans, leases or power purchase agreements associated with renewable energy or energy efficiency projects) totalled $1.5 billion in 1H15, almost half the $2.7 billion issued in Deal activity is muted because there are very few issuers in BNY Mellon 5

6 the market- only two green ABS deals took place in 1H15. In June 2015, Japanese car maker Toyota issued its second ABS in June 2015, raising $1.25 billion to fund new retail finance contracts and lease contracts for Toyota and Lexus vehicles that meet specific green criteria related to powertrain, fuel efficiency and emissions. This followed the $1.75 billion issuance in March 2014 the first-ever in the auto industry and thus far the largest green ABS in the clean energy sector. In April 2015, US-based residential clean energy financing provider Renovate America completed its third securitisation of Property Assessed Clean Energy (PACE) bonds. The $240 million proceeds will be used to finance green projects such as solar power, energy efficient HVAC, windows, and roofing, and water capture systems across the US. SolarCity, one of the most active issuers of innovative green ABS, did not execute any solar asset-backed note placements in 1H15 after raising $825 million through four transactions between November 2013 and September Nevertheless, in July 2015, the US-based residential solar developer announced and completed a private placement of $123.5 million solar asset backed notes due February Top 10 green bond issuances 1H15 Issuer Issuer Country Date Deal size ($ million) Green bond/ issuer type Currency Maturity (years) Annual coupon rate Toyota Financial Services USA Jun-15 1,250 Asset-backed USA n/a n/a securities DolWin1, 2 & 3 Germany May-15 1,089 Project bonds EUR % Transmission Line Projects EUR % TerraForm Power Inc. USA Jan Corporates USD % European Investment Bank Luxembourg Apr Multilateral GBP 5 n/a financial organisations Wind Energy Transmission USA Jan Project bonds USD 20 n/a Texas Project World Bank USA Mar Multilateral USD % financial organisations Bank of America USA May Investment/ USD 3 n/a commercial banks Transport for London UK Apr Governments/ GBP % Municipalities Berlin Hyp AG Germany May Investment/ EUR % commercial banks Vestas Wind Systems A/S Denmark Mar Corporates EUR % 6 BNY Mellon

7 Q&A with Stephan Bonte, CFA Director of Sustainable Investing, Standish Mellon Asset Management Company LLC How are you involved in green bonds? Standish is a dedicated fixed income investment management firm and as a signatory of the United Nations Principles for Responsible Investment (UNPRI) we support the development of sustainable investment practices in general and of Green Bonds in particular. A sign of our commitment is our membership to the Green Bond Principles (GBP) Executive Committee. The GBP Executive Committee is a great platform to engage with underwriters and issuers who share a common goal of growing the Green Bond market, while maintaining its integrity. We also conduct ongoing education efforts and dialogue with clients and consultants for whom sustainability is a growing focus. Clean Energy Pipeline s green bond database indicates a huge increase in issuances in the last two years but a slowdown in the rate of growth this year. Is this in line with your observations of the market? Absolutely, we estimate that Green Bond issuance tripled from 2012 to 2013, and then tripled again in 2014 to reach close to $40 Billion. Nobody expected a repeat performance in 2015, but issuance so far points to another up year. Issuance from certain types of organisation is only growing moderately. For example, issuance from government entities and supranationals is flat to only slightly up since Some of the slowdown may be due to a shifting focus of resources from issuance to reporting, as issuers in 2013/2014 submit their first annual impact reports. Also, we believe that the projects backing initial Green Bond issues were already in the pipeline. Current efforts are focused on growing a new pipeline of green projects. Thus, we view this pause in growth as a healthy development, rather than a cause for concern. Beyond issuance volumes, there are other indicators which point to growth. For example, more than twice as many corporations issued Green Bonds year-to-date in 2015 than in all of 2014 a growth reflected in total issuance volumes as well as the number of sectors represented. We have seen quite a lot of growth from financial issuers in particular, which is a significant development as they typically fund smaller projects. Variety is also increasing; highly-rated AAA and AA Green Bonds now represent less than a third of issuance, compared to over half in previous years. Similarly, issuance is diversifying in terms of currency and maturity. These developments contribute to building and engaging a diverse investor base. Notably, U.S. municipal issuance continues to exhibit healthy growth, which is impressive for a market that was essentially non-existent in BNY Mellon 7

8 What caused the surge in green bond issuances since 2012? We believe the surge in green bond issuance is the result of a combination of factors, as opposed to a single event. Undeniably, individual, institutional and political awareness around issues of climate change and sustainability has taken off in recent years. More pragmatically, the low yield environment since the Global Financial Crisis has put a cap on return expectations, as some investors feel that returns should be evaluated more broadly than just financially. In that sense, UNPRI and the development of Green Bond Principles acted as catalysts to the surge, but the pent up demand was already there. The leadership of early issuers, particularly multilateral institutions such as the World Bank and EIB, was instrumental in bringing visibility to the market. Additional transparency provided by second-party certifications, ESG vendors and related initiatives (e.g., the Carbon Disclosure Project [CDP] and Sustainability Accounting Standards Board [SASB]) also contributed to raising awareness and the ability to incorporate ESG considerations into investments, a concept that was difficult just a few years ago, particularly in fixed income. How close are we to having a standardised set of definitions or principles for what green bonds are and how the use of proceeds should be disclosed? How important is it that there are a set of standards? Attempting to universally define Green Bonds is difficult, as certain projects are considered green by some investors and not by others. This is why we support the approach taken by the Green Bond Principles, which define green fairly broadly, but also encourage detailed disclosures. With the work done by the Green Bond Principles, we are getting closer to the implementation of standards relating to disclosures of the proceeds of Green Bonds. We are only just starting to see how the proceeds of Green Bonds issued in 2013/2014 are being deployed, and so we are currently entering a validation phase. The World Bank, for example, just released its annual report, which was splendid in terms of impact assessment and the description of projects that Green Bonds have financed. In time, we expect the investment process for green bonds to mimic the investment process for securitized bonds, where investors review initial collateral characteristics, then monitor the collateral performance throughout the life of the investment. Has there been any change in the pricing of green bonds in recent years? No, primary market pricing has been in line with what our traders view as fair value for issuers based on several factors, including sector, credit risk, rating, maturity and overall spread levels. There is no green premium in the primary markets, which raises the question: Why should issuers consider issuing Green Bonds if they are priced in line with standard bonds? We believe that the benefit for issuers does not come from cheaper issuance on a bond by bond basis; instead, the value should be considered on an aggregate basis. By making Green Bonds part of their outstanding debt, issuers are signalling to investors their commitment to sustainability. They are demonstrating a long-term vision from management, which fixed income investors value, especially in the lower liquidity environment. Investors can take comfort in the information flow that directly results from compliance with the Green Bond Principles, which can be leveraged to manage their business 8 BNY Mellon

9 risk. After all, you can only manage what you can measure. On a final note, benefits from Green Bond issuance also come in the form of a more diversified buyer base. This is appealing in and of itself, but when you consider the typically longer-term horizon from investors focused on sustainability, issuers can reshape their funding profile for the better. In your view, how is the market likely to evolve? We believe that the Green Bond market will continue to grow, both in size and diversity. More existing green projects are already finding their way to Green Bond issuance; the development of the U.S. municipal market is a prime example, as is the growing share of financial corporate issuance. Currently, Green Bond cash flows do not differ from similar standard debt offered by the same issuers. This was probably a necessary first step to encourage broad adoption by the market. We believe that as the Green Bond market matures, new bond structures will come to light which will loosen that link. Securitized or project-based issues are early signs of things to come, but other more creative structures could also be designed. Risk-sharing deals from multilaterals or performance-based coupons payments, for example those based on carbon credits, could meet investor demand. bnymellon.com BNY Mellon is an investments company. We provide investment management and investment services that help individuals and institutions to invest, conduct business and transact in markets all over the world. Key Contact Alex Over Managing Director, Global Sales and Product Strategy aover@standish.com (+1) BNY Mellon Investment Management is one of the world s leading investment management organizations and one of the top U.S. wealth managers, encompassing BNY Mellon s affiliated investment management firms, wealth management organization and global distribution companies. Standish Mellon Asset Management Company LLC ( Standish ) is a BNY Mellon Investment Management firm; BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation. The comments provided herein are a general market overview and do not constitute investment advice, are not predictive of any future market performance, are not provided as a sales or advertising communication, and do not represent an offer to sell or a solicitation of an offer to buy any security. Similarly, this information is not intended to provide specific advice, recommendations or projected returns of any particular product of Standish Mellon Asset Management Company LLC (Standish). These views are current as of the date of this communication and are subject to rapid change as economic and market conditions dictate. Though these views may be informed by information from publicly available sources that we believe to be accurate, we can make no representation as to the accuracy of such sources nor the completeness of such information. Please contact Standish for current information about our views of the economy and the markets. Portfolio composition is subject to change, and past performance is no indication of future performance. ABOUT CLEAN ENERGY PIPELINE company offers customized research and organizes senior executive forums. For more information: +44 (0) (EMEA) or (Americas) Subscription enquiries: ce.sales@vbresearch.com BNY Mellon 9