REFILE - Green quasi-equity reaches Japan
A debut labelled green offering of up to ¥100bn (US$630m) of what Japan terms “bond-type class shares" highlights how the country’s companies combine characteristics of hybrid bonds – one of Europe’s most successful ESG corporate finance instruments – with enormous household savings in order to achieve decarbonisation.
According to the Ministry of Economy, Trade and Industry, Japan will need ¥150trn, equivalent to US$937.5bn, of public and private sector investments over the next 10 years, but institutional money alone may not be enough to fund such large decarbonisation investments.
“We of course do green hybrid bond deals for institutional investors, but this type of instrument is needed to draw individual investors’ funds,” said Shintaro Nishimura, head of structured finance and solutions at Nomura.
“Most of the investors in Japan’s hybrid bond and loan market are institutional investors, but the hybrid bond market peaked at just under ¥3trn roughly about three or four years ago and has been declining since then,” Nishimura said. “Japan's household sector has more than ¥1,000trn in cash and deposits, so we thought, if we develop an instrument that can unlock those household sector funds, we can connect the household sector and companies' funding needs.”
Hybrid bonds and bond-type class shares are similar as both are eligible for 50% equity treatment and have no rights to vote or convert to common shares, but as opposed to hybrid bonds that are considered debt, bond-type class shares are a type of preferred stock.
Infroneer Holdings – an infrastructure services company that has already put its name to a rare green convertible bond – is planning to sell green bond-type shares in the first such offering in Japan.
It is selling 20m bond-type shares at the offer price of ¥5,000 each via underwriters Nomura, Mizuho, SMBC Nikko and Daiwa. The annual dividend rate for the first five years is indicated in a range of 2.3%–3.0%, with final pricing to be decided from July 12–17.
The deal will be issued under the company’s green finance framework, with proceeds to be used to refinance part of a loan relating to a share acquisition in Japan Wind Development in January.
The new issue from Infroneer follows an even larger unlabelled deal of ¥120bn for SoftBank Corp in October. Although not a formal green hybrid, the telecom operator’s jumbo deal had developing and procuring renewable energy as one of its uses of proceeds (building next-generation social infrastructure was another, which some investors would view as making it a “sustainable” green and social deal).
According to Nomura, 90% of SoftBank’s bond-type class shares were bought by retail investors. They are listed on the Tokyo Stock Exchange and can be traded by retail investors, as will be Infroneer’s new issue.
European boom
Japan is one of the first markets beyond Europe to show appetite for the quasi-hybrids.
In Europe, ESG corporate hybrids have now racked up issuance of US$40bn-equivalent across euros and sterling. H1 sales of just under €9bn already represent the best annual supply figure since issuance began in 2017, according to LSEG data – with six months of the year still to run.
Green and a handful of social and sustainable-labelled deals now represent as much as 21% of total European corporate hybrid sales, according to NatWest data.
Already in 2024 there have been 12 new issues in euros, with the largest coming from Telefonica in March.
The US has also seen a handful of green preferred share deals from issuers such as utility Vistra and renewable investor Brookfield.
“It is not surprising that this is happening now outside of Europe,” said Luca Manera, investment manager at Asteria Investment Management. “We have seen a growing use of hybrids in the format of green bonds which makes strategic sense for issuers in sectors that have stable long-term cash flows but the climate transition requires large upfront capital expenditures.”
“As companies shore up their balance sheets and accelerate their transition plans, hybrids have proven to be a compelling option for corporate treasurers: while moving their asset base to a more sustainable footing, a green perpetual instrument is seen as aligned with this strategic shift,” said Arthur Krebbers, head of corporate climate and ESG capital markets at NatWest, who termed the instrument a “compelling financing option for issuers” in a research piece.
(Additional reporting by Sunny Tse.)