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Bank capital goes green

One intriguing sub-plot of a wild year in bank capital has been the advent of green AT1 and tier-2 deals.

Peter Lee capital markets 1920px.jpg

At first glance, bank capital is not an ideal asset class for green investors.

While debt finance can be raised from investors in ESG funds and allocated to projects with specific environmental, social or governance criteria, capital is more fungible. It is typically not passed through on a back-to-back basis to support specific green risk-weighted assets.

Until recently.

BBVA paid a coupon of 6% on the first-ever green AT1 deal in July, a €1 billion, non-call five-and-a-half year offering.

It is an historic deal that shows the growing influence of ESG funds
David Marks, JPMorgan

At issuance, BBVA communicated a total portfolio of €2.9 billion of green assets, including renewable energy (49%), green buildings (19%), clean transportation (22%), waste management (6%) and water management (4%).

Proceeds will be tracked internally against these. BBVA says it will maintain a buffer of projects above the proceeds in case of unexpected variations on projects’ outstanding amount or maturity mismatches.

If an allocated project ceases to comply with the green eligibility criteria, BBVA will substitute it for a fully compliant project.

The bank sought a second-party opinion from DNV GL and says external auditor assurance will be provided in annual reporting.

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