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.
Socially responsible investors accounted for 44% of the allocated order book on a deal that paid no new issue premium and attracted €3 billion of demand.
“It is an historic deal that shows the growing influence of ESG funds,” says David Marks, chairman of FIG DCM at JPMorgan, which was a bookrunner on this deal as well as on a green tier-2 transaction for Utrecht-based De Volksbank.
Having green capital standards could be an interesting future development
Julien Brune, Societe Generale Corporate and Investment Banking
“This has been an overarching theme in the capital markets. Investors are saying they have a duty to support a broader ESG initiative.”
Julien Brune, co-head of DCM solutions and advisory, at Societe Generale Corporate and Investment Banking, says: “The BBVA deal captured a lot of attention, and green capital bond issuances may attract interest from new investors.
“Looking ahead, as capital supports a bank’s whole balance sheet, having green capital standards could be an interesting future development.”
In July, De Volksbank sold €500 million of green tier-2 bonds in accordance with a green bond framework it developed with ABN Amro. It was three-and-a-half times oversubscribed, with more than 120 investors providing total demand of €1.75 billion. Three quarters of the bonds went to green investors.
Bart Toering, managing director of De Volksbank, says of the deal: “It reflects our efforts to make our balance sheet energy-neutral by 2030.”
JPMorgan’s Marks says: “The green wrapper helped De Volksbank price flat to through fair value with no new issue premium. But we saw the depth of demand when a deal that had priced 20 basis points wide of the Dutch national champion later traded 10bp through it.”
Resilient
There is some evidence that green deals can be a little more resilient in choppy markets.
In late September, AIB issued into more uncertain conditions after the FinCEN papers came out. They caused one bank capital deal to be pulled when Julius Baer postponed its $350 million non-call seven AT1 transaction that it had hoped to price at 4.375%.
The Swiss bank came back a week later with a non-call six, but had to pay 4.875%.
AIB tested the market with a €1 billion tier-2 deal, the Irish bank’s largest unsecured offering since the financial crisis. With a coupon of 2.875%, the deal priced at 330bp over mid-swaps.
“That was a very limited new-issue premium and it was a successful deal, though it’s hard to discern how much that was down to it being green,” says one banker not in the syndicate for the deal.
In the capital markets, they say two deals is a trickle, three is a trend. Green bank capital is thus enjoying a, so far, brief European vogue.
Marks concludes: “And from a euromarket perspective, when so often new capital markets techniques arrive here after first appearing in the US, green bank capital is very much a European innovation.”
