Denmark Publishes Twin Bonds Details

    Stockholm (NordSIP) – On December 9th, the Danish central bank announced that its national finance ministry would pursue a novel “Twin bonds” model for the issuance of its upcoming inaugural sovereign green bonds, due to take place on 19 January 2022, conditional on stable market conditions.

    Deviating From the Original Plan

    This approach represents a deviation from Denmark’s original plan to issue “green certificates”, first discussed by the Danish central bank at the end of May 2020. That model separated the financial commitment to provide coupon payments and the principal at the time of redemption from the commitment that the expenditures will go to green projects. As a result, the “green” bonds issued by the Danish sovereign would in effect be regular vanilla bonds complemented by a separate “green certificates”. According to the Danish central bank, owning both the conventional government bond and the green certificate would have been equivalent to owning a sovereign green bond.

    The choice between the “Twin bonds” and the “green certificates” is the result of the Danish central bank’s concerns for liquidity conditions in any upcoming sovereign green bonds. Referring to the liquidity premium, the central bank noted that “a liquid government bond market is essential, as a high degree of tradability means that investors are willing to pay a higher price for the bonds, implying reduced funding costs for the Kingdom of Denmark,” in 2020.

    According to the feedback received by Jaap Kraan and Jochem Wiersma, Directors for the Nordic region at Dutch asset manager NNIP, the switch to the “twin bond” structure may have been a response to market preferences. “Some Danish (institutional) investors have been skeptical about the initial certificates structure. As they will most likely find more comfort in this structure, we expect that this issuance could trigger them to further incorporate Green Bonds This could show Danish investors that Green Bonds play a fundamental role in the transition to a net zero environment. In other European countries (e.g. Netherlands, Germany) we have seen a pick up in demand for Green Bonds after such an issuance by their Government. Besides a rise in supply, the appetite for green bonds could further pick up, especially among the smaller institutional- but also among retail investors in Denmark on the back of this development,” Kraan and Wiersma tell NordSIP.

    The Twin Bond Concept

    The green bond is issued as a twin bond in line with the twin bond concept introduced by Germany in 2020. This implies that the green bond will be issued with the same financial characteristics as one of the central government’s existing conventional on-the-run issues.

    The idea behind the “twin bond” concept is to support liquidity in the green bond. This is achieved by providing a green bond with identical characteristics to an existing general-purpose benchmark bond to allow investors to switch from green to the corresponding and more liquid conventional 10-year twin bond one-to-one at any time. However, investors will not be able to switch the conventional twin bond to the corresponding green twin bond.

    Trading and liquidity in the new green bond are further supported by existing initiatives established for the conventional government securities. This includes the central government’s securities lending facility, which will apply to the green bond in line with other government securities. Danmarks Nationalbank will at all times ensure that the total outstanding amount of green bonds, including securities lending, does not exceed the amount of eligible green expenditures.

    Accordingly, the new 10-year green bond will have the same 2031 maturity, 0% coupon as the existing central government’s 10-year benchmark bond with those characteristics (ISIN: DK0009924102). The green bond will be launched via auction in line with the Kingdom of Denmark’s other domestic bonds.

    The expected issuance volume will be announced in connection with the announcement of the central government’s borrowing strategy in December. The issuance volume of green bonds is determined on the basis of the amount of eligible green expenditures, which constitutes an upper ceiling, while taking the overall borrowing strategy into account.

    Green Bond Framework

    The proceeds from the green bonds will be allocated to green expenditures and investments undertaken by the central government, in line with the Kingdom of Denmark’s Green Bond Framework.
    Eligible green expenditures under the framework are evaluated and selected on the basis of the definitions and criteria in the EU classification system for sustainable economic activities (the ‘EU Taxonomy’) as adopted by the Commission on 4 June 2021 in the first Delegated Act for climate change mitigation and climate change adaptation activities. The eligible green expenditures under the Danish framework focus on climate change mitigation and activities that do no significant harm. The eligible green expenditures included under the Kingdom of Denmark’s Green Bond Framework supports the production of renewable energy, including wind and solar energy and the green transition of the Danish transport sector.

    CICERO Shades of Green rated Denmark’s green bond framework “Dark Green” and described its governance procedures as “Excellent”. The green bond framework is aligned with the Green Bond Principles (2021) from the International Capital Market Association (ICMA) and has sought to align with the proposed regulation on a European Green Bond Standard (EU GBS), including the reporting and external verification requirements.

    The central government will report on the allocation of proceeds from the sale of green bonds, and on the expected climate and environmental impact.The central bank of Denmark publishes a document detailing the amounts eligible for green expenditures which is updated annually following the confirmation of the Budget Act for the following year. The information is published once the realised amounts are known in connection with the publication of the central government accounts.

    Market Views

    “We are pleased to help Danmarks Nationalbank issue its first green bond as it will bring more finance to green investments and thereby support the transition towards a greener society,” says Claus Harder, Global Head of Markets & Transaction Banking at Danske Bank. “One of the advantages of issuing a green bond is the increased demand from investors resulting in better borrowing conditions for the issuer compared to a conventional bond,” Gustav Landström, Global Head of SSA Origination at Danske Bank, explains. He elaborates “In this case, the green bond will be issued together with a conventional governmental bond. This is called a Twin Bond structure which will make it possible to issue green bonds without compromising the liquidity in conventional Danish government bonds,” Landström adds.

    “To me what stands out about this framework is the extra efforts taken to seek alignment with the EU Taxonomy. A lot of hard work has gone into that. Not just in aligning the expenditures with the TSC but also to ensure a sufficient and relevant governance structure and selection process to address the DNSH considerations,” says Jacob Michaelsen, Head of Sustainable Finance Advisory at Nordea.

    “We welcome the issuance of a green bond by the  Danish Government as it is a signal that Denmark wants to greenify their capital market,” says Bram Bos, Lead Portfolio Manager Green Bond at Dutch asset manager NN IP. “We were not in favour of ‘green certificates’ as, in our view, this would be a structured product with no coupons and zero value on maturity,” Bos says. “This would not be in line with the use-of-proceeds concept that proceeds are collected and separated from the other activities of the issuer and are traceable at all times. This would also not fit in our green bond portfolios as we do not like the idea of buying a certificate which suddenly could turn a bond into a green bond,” Bos explains.

    According to Bos, the level of disclosure by Denmark regarding the do no significant harm (DNSH) principle of the Taxonomy is welcomed because it is “clearer and easier to use” than the technique used by other sovereigns green bond issuers. Denmark discloses DNSH by specific activity as opposed to other sovereign issuers who referred to their national adaptation plans. Bos also welcomed the relative simplicity of the green bond framework proposed by Denmark. “The framework is straightforward with only renewable energy and low-carbon transportation included. Also the types of the expenditures have been clearly illustrated (capex, opex, tax, or subsidy),” Bos concludes.

    Image courtesy of Danmarks Nationalbank
    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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