Supply and greenium rising in sustainable bonds

IFR 2367 - 23 Jan 2021 - 29 Jan 2021
4 min read
Tessa Walsh

Natixis is expecting euro-denominated green and sustainable bond supply to rise by more than a third in 2021 as increasing investor demand continues to boost the "greenium" and improve the economics for issuers seeking to raise sustainable debt.

The bank is forecasting €330bn of green and sustainable supply, with a significant increase in SSA ESG issuance to €190bn from €136bn last year, through increased sovereign green bond issuance and rapid growth in the sustainability-linked bond market.

The bank’s analysis covers all euro-denominated green and sustainable bonds as defined by industry body ICMA, including specific "use-of-proceeds" deals such as green, social and sustainable bonds (a mix of green and social) as well as sustainability-linked bonds that tie financing costs to ESG targets.

Natixis is also measuring pricing developments around the green premium – or "greenium" – that borrowers can secure by issuing sustainable debt, which provides the issuer a pricing advantage over and above a conventional bond.

ESG bonds are on average pricing with lower new issue concessions – the price relative to fair value – compared with conventional bonds and often pricing through the fair value of conventional bond curves entirely.

“The pricing differences are there, they are persisting over time and they are getting more pronounced,” said Radek Jan, a green and sustainable bond analyst at Natixis.

The French bank said that ESG bonds are also seeing more spread tightening between initial price thoughts and final pricing than conventional deals.

ESG bonds issued in euros by SSA issuers are showing a greenium of 1.5bp–2bp on social bonds and around 1bp–1.5bp for green bonds, with a bigger greenium for longer-term bonds.

Euro-denominated corporate ESG bonds have an average greenium of 3bp, representing around 6%–7% of the spread, while US dollar deals are showing a higher greenium of 4bp–5bp.

German automaker Daimler is seeing a significant greenium of more than 10bp, Natixis said.

“The greenium today is at its highest point in history, which is attractive for issuers when tapping this format,” said Thibault Cuilliere, head of real asset research at Natixis.

The bank also sees a greenium emerging for the banking sector of around 1.5bp–2bp for senior preferred bank debt and around 5bp for non-preferred senior, which is around 10% of the spread.

Since the third quarter 2020, the average concession necessary to price Triple B euro-denominated corporate green and sustainable debt has been negative in contrast to conventional new issues. In several instances the deepest negative concession was for issuers making a sector debut in the ESG market, such as Daimler (–14bp) and cement maker LafargeHolcim (–6bp) or inaugural issuers, such as real estate development firm Icade Sante (–14bp).

EU dominates

The EU is expected to remain the biggest ESG issuer in 2021, with €45bn of social bonds under its SURE employment programme earmarked for the first half and around €30bn–€40bn of green bonds as part of its €750bn Next Generation recovery fund in the second half of the year, Natixis said.

The bank is also expecting strong volume from French agencies issuing in the social format. Cades is expected to issue around €40bn and around €20bn is likely from Unedic.

Euro-denominated sovereign green bonds are forecast to surge 67% to around €40bn in 2021 – from €24bn in 2020 – as Spain and Italy issue benchmark green bonds of around €6bn each.

France is expected to bring a 20-year green benchmark and tap its existing green bond, bringing the overall size of the green OAT market to €10bn–€12bn while Germany is poised to issue again as other countries tap bonds.

Natixis is forecasting around €12bn of sustainability-linked bonds as the new market continues to grow.