August was not a big month in terms of green bond issuance but the market continued to take important steps along the road to maturity, while participants are becoming increasingly excited about the prospect of a golden autumn, writes Peter Cripps.
There have only been six green bond issues so far in August, with a value of some $2.7 billion, as the market finally succumbed to a summer slowdown. But some of the issues were significant.
The EIB's €10 billion
The EIB's most recent issue, for €600 million ($677 million), means it has now raised a total of €10 billion through its Climate Awareness Bonds (CABs) programme.
The EIB issued what is widely seen as the first ever green bond, in 2007, and passing the €10 billion milestone highlighted the importance of the multilateral development bank in continuing to develop the market.
There were two other interesting aspects of this issue. One was that the EIB's latest issue was a new bond, rather than a tap of its two previously issued euro-denominated green bonds. The EIB now has three CABs in circulation, each with different maturity dates, meaning it is now building a yield curve for the asset class.
Another interesting feature was that the latest CAB had a third-party opinion from ratings agency Oekom, which has also rated the entire CAB green bond framework.
Unlike the IFC, which has a second opinion from Cicero for its green bond framework, the EIB has not commissioned a second opinion on its framework. However, Oekom rated the framework because it saw demand from investors who, presumably, are willing to pay for such information.
SolarCity's A grade ABS
SolarCity's latest asset-backed security (ABS) is also noteworthy. As our recent analysis piece argues, the solar rooftop leasing company has helped pioneer the solar ABS market with its four issues so far.
However, this issue was significant because the senior tranche garnered an A credit rating from Kroll, while the subordinate part was given a BBB rating. Both were higher than SolarCity's previous ratings from Standard & Poor's, which recently restated its belief that it was too early to move the credit rating above low investment grade.
Although SolarCity switched ratings agencies, the higher rating can be seen as a sign of growing investor confidence in this immature asset class, which has the potential to play a key role in recycling capital in the booming US solar rooftop market.
Record-breaking muni bond
August also saw the largest ever US municipal green bond, from the Central Puget Sound Regional Transit Authority – a transport body in the state of Washington – which raised a bigger than expected $944 million.
This was one of the few US muni bonds to have a second opinion, from Sustainalytics, which concluded that "investors in Sound Transit green bonds can be fairly confident that their investments will result in positive environmental impact".
Currently, most US muni bonds don't engage second-opinion providers, with DC Water and Spokane the notable exceptions.
IFC and Yes Bank
An innovative INR3.15 billion ($49 million) transaction came from India when the IFC bought a private placement from Yes Bank, and paid for the transaction with its own green bond.
The IFC's green bond is known as a Masala bond because it is denominated in rupees but listed on the London Stock Exchange in an attempt to attract a wide range of investors.
The deal is innovative because it effectively means that the IFC is lending its AAA balance sheet to help attract investors into India. In turn, Yes Bank will use the proceeds of its green bond to help fund renewables projects in the country.
The transaction marked the IFC's first green bond investment in emerging markets.
Arun Kumar Sharma, a CIO at the IFC, said more transactions like this will be considered and he has already had enquiries from numerous other countries.
TerraForm's record-breaking coupon
SunEdison has been cutting deals at a dizzying pace in recent months, as it storms ahead on its breathless charge to become a blue-chip renewables powerhouse.
It is leaving its mark on the green bond market, too. Its second yieldco, TerraForm Global, has issued an $810 million green bond with a coupon of 9.75%, believed to be the highest yielding issue that the market has seen so far.
The issue provides a welcome injection of high-yield notes into the green bond market, which has until recently been dominated by AAA rated multilateral development bank issues.
A golden autumn?
Market participants say autumn and the run-up to the Paris climate change summit are expected to be "busy" periods for the green bond market.
Issues are expected to come from all parts of the globe, with emerging markets to the fore. There are numerous rumours about power producers and banks in India getting in on the act, for example. India is a particularly interesting market because, arguably, it needs the green bond market to help it attract overseas capital if it is to hit its ambitious 175GW target of renewables by 2022. (Look out for our forthcoming feature on the Indian renewables market.)
A recent note from green bond pioneer Christopher Flensborg at SEB agrees that more growth for the green bond market lies ahead – it cited "indications from clients" that issuance will continue picking up in the autumn. However, he downgraded his full-year issuance forecast from $70 billion to between $50 billion and $70 billion.
This would mean that the value of overall outstanding issues in the green bond market breaks through the $100 billion barrier before the year is out. Another milestone to look forward to. EF
