De Volksbank sold an inaugural green Tier 2 last Wednesday, attracting €1.75bn of demand to a €500m deal that some bankers said was priced inside fair value, a success expected to spark further interest in green capital.
The Dutch lender's 10.25-year non-call 5.25 transaction was the first ESG Tier 2 from a bank in Europe, excluding Turkey.
The issue – along with the first green Additional Tier 1, sold by BBVA on July 7 – has brought into focus the merits and potential of green bank capital. The nascent sector is expected to grow, but some market participants hold concerns.
Bart Toering, managing director at de Volksbank, said the move to sell green Tier 2 was part of the bank's overarching strategy, into which sustainability is being fully integrated.
The bank, which priced an inaugural green senior last year, aims to have a carbon-neutral balance sheet by 2030.
Toering said green capital will not fit every bank, and that investors must be convinced not only by the technical aspects of the transaction but also that sustainability is integral to the issuer's strategy.
"You need to have a good story," he said.
De Volksbank is ideally suited to issuing green Tier 2 because, besides its carbon-neutrality target, it has a simple balance sheet focused predominantly on mortgages, he said.
Proceeds from the trade – rated Baa2/BBB by Moody's/Fitch – will finance loans relating to green buildings and energy efficiency from de Volksbank's roughly €5bn pool of eligible assets.
STARTING THE PROCESS
The concept of green bank capital has sparked debate. Some investors and bankers expressed scepticism over BBVA's green AT1 from July 7, although the €1bn deal still attracted more than €2.75bn of orders and priced at around fair value at 6%.
Green bank Tier 2 is expected to gain wider acceptance than green AT1 among dedicated ESG investors, in part because Tier 2 is less subordinated and is dated rather than perpetual.
"Green Tier 2 is a much easier proposition for investors to support," said a sustainability banker. "It isn't as deeply subordinated and it's not perpetual, which enables green bond funds that can only invest in dated products to get in on the action."
Indeed, some 73% of de Volksbank's deal went to ESG accounts, a much larger share than the 44% of BBVA's AT1.
The sustainability banker added that issuers' choices between different green formats will depend partly on where they receive incremental demand, enabling more tangible pricing benefits.
But some market participants remain unsure whether it is appropriate for green bonds and bank capital to be combined.
"There is a question about whether banks should push green credentials into capital instruments, and whether the proceeds from capital instruments should be used for lending [albeit green] as opposed to being held in low risk treasury assets," said Bjorn Norrman, investment manager at Kames Capital.
"The latter is seemingly more in accordance with resolution legislation, whereby capital instruments can more easily be bailed in if necessary. This consideration applies equally to both the BBVA AT1 and the de Volksbank Tier 2."
Toering said issuers of green capital will need to provide in-depth reporting and explain how their capital will be treated in order to deal with investors' concerns.
"We are the ideal bank to start that process," he said.
Guidelines from the European Banking Authority could also be helpful, he said.
Toering said he expects all of de Volksbank's future issuance to be green, across the capital structure. He also said the bank does not need to issue AT1 in the coming years, but if it did he expects any such outing to be in non-green format.
"A GOOD START"
De Volksbank entered a market slowing down into the summer period and took advantage of an appealing window for sub debt.
Spreads have held firm over recent weeks, and while still elevated versus pre-crisis levels, are some way below their Covid-19 peak.
The no-grow €500m trade priced at 210bp over mid-swaps, well inside the 240bp area IPTs.
Bankers agreed the borrower paid no new issue concession, with some saying the deal came as far as 10bp through fair value. It outperformed and was bid 6bp tighter by Friday afternoon.
Bankers hesitated to attribute that result solely to the green element of the deal, and said demand was probably also helped by the rarity of subordinated paper from de Volksbank.
De Volksbank had not sold a benchmark subordinated transaction since 2015, when it issued a €500m 3.75% November 2025 Tier 2 that comes up for call in November this year. It has no other benchmark Tier 2 debt outstanding.
Bankers said the success of de Volksbank's deal is likely to increase issuers' interest in green bank capital.
"The fact that we now have the first European, ECB-regulated institutions – BBVA doing AT1, now de Volksbank bank Tier 2 – will encourage others to consider the possibility of issuing green bank capital," said a banker at one of de Volksbank's leads.
"It is a good start. I'm on the phone to many other issuers now. Everyone needs to think for themselves, look at their own strategy on sustainability, if [green capital] fits and in what form it fits."