By Jörg Baseri
(Reuters)-Investors have long paid a premium to get rare green bonds, but record issuance may be trying to change that.
Bonds sold to fund environmentally beneficial projects tend to be more expensive and yield lower than traditional bonds. However, in the euro corporate bond market, the difference (what is called greenium) almost disappeared in April.
The European Financial Markets Association, an industry group, compared option-adjusted credit spreads on Eurogreen bond indexes with comparable indexes on traditional bonds, giving investors a substantial premium on holding green corporate bonds in April. I found that I didn’t pay. This is comparable to the 2020 average of 9 bps premium.
Most green bonds do not have traditional peers that can be compared directly, so estimates vary by methodology. However, market players generally agree that the green is shrinking.
Drivers seem to have a significant increase in supply.
According to Refinitiv, companies in the euro investment-grade corporate bond market, which are the main source of green funding, have already raised about the same amount through green bonds this year as in 2020 as a whole.
Good news for investment funds that are forced to invest under environmental, social and governance (ESG) beliefs. However, borrowers may need to reassess the cost benefits of raising funds through the green market.
(Graphics: Greenium Decrease in 2021-https://fingfx.thomsonreuters.com/gfx/mkt/ygdvzxybyvw/BjZVB-greenium-dwindles-for-euro-ig-corporate-bonds-in-2021%20 (1) .png)
According to ABN AMRO (AS :) data, green issuers paid a smaller new issue premium this year when selling bonds than traditional issuers, but the price advantage over traditional issues is It has halved compared to 2020.
The surge in issuance occurred as borrowers raised $ 193 billion globally from green bonds this year, a record for this period until May 25, according to Refinitiv data, at this point in 2020. It is almost three times the amount raised.
“There is a limit to how much green can be earned, and investors still need to get a return,” said Burnaby Martin, head of credit strategy at Bank of America.
“If the supply of green debt increases, it will eventually hurt the technical.”
Another sign that green bonds are declining, according to Refinitiv, is that green bond issuance accounts for 16% of euro investment-grade corporate bond sales this year, more than double the share of last year. ..
Shanawaz Bhimji, senior bond strategist at ABN AMRO, said most of the euro issuance came from utilities and real estate companies, noting that many green bonds have already been issued in these sectors.
“If there are few issues from the sector that offers diversification, the market will not be profitable,” he said.
(GRAPHIC: Green Bond Issue-https://fingfx.thomsonreuters.com/gfx/mkt/oakvebzxmpr/mF9gw-green-bond-issuance-triples-on-this-time-last-year.png)
Government bonds and the corporate sector, where green bonds are rare, are still greening. For example, Daimler’s green bonds offer a credit spread that is 7 basis points narrower than traditional bonds that mature in the same year.
Also, according to Goldman Sachs (NYSE :), in the US dollar investment grade market with few green bonds, green borrowers have enjoyed a price advantage of about 10bps at issue since 2020, but in 2016. It is down from 16bps. 2019.
But on both sides of the Atlantic, banks argue that shortage premiums are shifting to social and sustainable bonds.
While social bonds are used for medical and education spending, sustainability bonds can fund both social and green projects. They are in short supply as they only started publishing after the outbreak of last year’s pandemic.
Goldman estimates that since last year, these bonds have provided issuers with an average premium of 20bps for issuance in the euro investment grade market and 36bps in US dollars.
The good news for those who believe in the power of green finance to improve a company’s credibility with the environment is that the decline in green funding is not deterring issuers.
“I’ve heard from companies that it’s not just a matter of concessions,” said Bhimji of ABN AMRO. “They want to improve their position in the investment community.”
“Greenium” shrinks as climate change bond sales swell to record highs Reuters
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