Germany's debut green bond sale on Wednesday pulled in more than €33bn of demand, enabling the borrower to price through its conventional curve, demonstrating the growing appeal of the asset class for investors globally.
The sovereign became the second issuer in two days to fully use the attraction of the green format with investors to price through its non-green curve, following Sweden on Tuesday.
But Germany's status as the main reference rate in Europe and its intention to build a liquid green curve made the €6.5bn 10-year transaction, of which €500m was retained by the issuer, a milestone for the market.
"This trade is particularly important for the sovereign space and could easily be replicated by other issuers, especially those that have a similar infrastructure like their own trading desks," said Achim Linsenmaier, global head of public sector origination at Deutsche Bank.
Leads Barclays, Credit Agricole, Commerzbank, Deutsche Bank, JP Morgan and UniCredit started marketing the August 2030 transaction at flat area over Germany's conventional August 2030.
However, with books closing in excess of €33bn, they were able to move the level to 1bp though the conventional Bund, erasing all new issue premium and pricing through the conventional curve.
"It was exactly as I expected to be: huge demand. The fact that there's a negative new issue premium is not surprising given the nature of it as it was always going to get a huge focus for anyone with an ESG angle," said a DCM banker away from the trade.
"The fact that they went out flat to fair value doesn't surprise me at all given that it was the point of what they were looking at doing, and the fact that it came 1bp through is not really a surprise given the size differential."
Jesus Martinez, senior portfolio manager at Aegon Asset Management, said the pricing was justified given Aegon AM's aim to actively help in the climate transition.
"Given that the market is still in a developing phase, the scarcity makes it necessary that there will be a premium to pay for both traditional and green investors," he said. "In this case, I think 1bp was reasonable. There was a big demand for the bond and the pricing was more than fair."
Unlike other sovereigns that have picked new points on their curves for their green bonds, Germany adopted a so-called twin structure as it sought to provide investors with an insight into the price differential between conventional and green bonds, and market participants' demand preferences for various green bond maturities.
"It's much easier to pinpoint the greenium in this case," said Linsenmaier.
"Usually, you have to do some calculation, you might have an on-the-run, an off-the-run bond, you might need to interpolate. Here, the pricing is in favour of the green bond and if it continues to perform and richen against the conventional, it helps demonstrates the added value of issuing in the green format."
For Aegon AM's Martinez, the twin concept was a smart one.
"It should help not only Germany but other issuers in assessing what each bond's green premium should be at a given point in time," he said, adding that Germany's approach to the use of proceeds and its long-term green strategy was one that he liked.
"With each new issuance, you see a higher degree of sophistication," he said. "They don't just comply with the green bond principles but go a bit beyond and each one tries to shine brighter than the previous one."
CONCEPT VERSUS REALITY
Still, while the transaction was clearly a success from a primary perspective, market participants are keen to see how the twin concept will function in secondary.
"The mechanism whereby you can swap out of the non-green into the green and vice versa, I don't really see a huge benefit to it given that if you're a green account, you're never going to make use of that switching and if you're a non-green, I don't see why you'd want to apart from liquidity," the DCM banker said.
But liquidity was precisely one of the issues that Germany was seeking to address.
"It helps overcome some investors' concerns given that typically there is a lack of liquidity in these greens bonds as they tend to be smaller than conventional," said Linsenmaier
"The concept was welcomed by investors as it gives them upside potential with very limited to no downside as they can always exchange on the same terms."
The feature could be particularly helpful in times of market stress, Linsenmaier said.
"If, as a fund manager, you are getting outflows, you need to be able to guarantee that you can cover these and that you don't have underperformance in your portfolio, which sometimes can happen in the smaller, less liquid deals."
A syndicate banker away said that while it was clear that Germany had been successful in getting investors onboard with the twin mechanism in primary, he said the full implications were yet to be seen.
"I'm not convinced we've seen everything or understood everything around the implications of this sort of mechanism over the medium to long term," he said.
"We'll have to see how it works in practice, in terms of liquidity, how you move from one to the other. It's clear on paper but let's see how it works."
"It will be interesting to see how it trades as well."