Green Bond Review – May 4

Stockholm (NordSIP) – This week’s Green Bond Review is about the “greenium” and the hunt for yield. NordSIP met with Anna Reuterskiöld, Green Bond Origination at Nordea’s Debt Capital Market team to discuss her and Nordea’s views on the green bond market trends. She gaves some interesting figures.

All aboard the standardisation train

The trend Reuterskiöld sees as most prominent over the foreseeable future is further standardisation. “The European Commission’s Action Plan to Finance Sustainable Growth is promising in terms of further standardisation, which has been requested by issuers and investors alike to create clarity and thereby a good environment for issuance,” she comments. “Two years ago, all the market was talking about was standardisation. This year we actually see some promising signs of it happening. Better standards bring clarity and thereby a sense of security in the market as the rules of engagement become increasingly transparent.”

Diversification boosting growth

Reuterskiöld also sees further diversification amongst the issuers, especially in the Nordics. “Traditionally issuers have been dominated by Sovereign, Supranational and Agency (SSA) bonds, but for the past three years the Green space has seen increasing supply from Corporates as well as from Financial Institution Groups (FIG),” she explains. “We also see a broader range of issuers coming into the sustainable bond space, even if the ‘Green’ space is still by far the most prominent.”

Particularly the corporate sector is one that shows promising signs. According to Nordea the corporate sector made up the largest portion of Global Green bond supply last year with about 42%. This was the first time ever that the corporate sector was the largest driver of supply as the FIG sector took the crown in 2016, and the SSAs in all other previous years.

A burgeoning Green high yield market?

“It is clear that over the last 3 years we have seen Green bond supply flow down the rating-waterfall as it used to be predominantly a AAA product but in recent years we have seen supply in both the AA/A-sector and also the BBB,” Reuterskiöld adds. The added diversification is certainly positive for the market as dedicated Green bond investors are able to mimic their traditional portfolios. However, despite some early signs of Green bonds in the HY space Reuterskiöld believes that we are still a few years away from seeing a burgeoning Green bond market in the high yield space. “At Nordea we have ongoing discussions with the broader range of potential bond issuers in the Nordics. And although we have previously seen Green bond transaction in the high yield space, such as through Scatec Solar’s NOK750m transaction last year, it is important to recognise that the dynamics are quite different. We simply don’t see the same outright demand for Green bonds by the high yield investor community as we do in the IG space.”

The conundrums of tighter pricing

One topic that both investors and issuers continue to bring up is the discussion of Green bond pricing difference, or “Greenium” (Green premium) as it is also referred to. “The very existence of the “Greenium” is a matter of debate,” says Reuterskiöld. “Or rather, the data is fairly inconclusive when looking at the market more broadly. It is true that in some regions, such as in the Swedish market, we are seeing a fairly clear sign of a Greenium. However, we still lack the data to draw any conclusions based on statistically significant evidence.”

A major concern of green bond proponents is that too tight a pricing might turn investors away from the concept all together. “While it may be too early to call the shots,” continues Reuterskiöld, “the market’s strong demand appear be able to withstand a little greenium, at least for now. If I had to put a number on it I would say that the Greenium in the Swedish market average around 3-5bp – although that is somewhat dependent on the type of issuer and rating.”

Coming back to Kommuninvest

One example of tight pricing was displayed last week when AAA-rated Kommuninvest issued its fourth green bond. The book-building was particularly fast: half an hour after the book opened, the issue was already over-subscribed; 45 minutes later, the book reached 1.5x the size, and it closed an hour after that, at a spread of -14 basis points, indicating a discount of around 3-4bp compared to their curve. The last time Kommuninvest went to the SEK market in Green the discount was around 2bp. “This is a great example of a Greenium”, Reuterskiöld says, “but it shouldn’t be seen as a guide for the wider market.”


Photo © NordSIP