Germany’s €6.5bn 10-year inaugural green bond was a milestone in sustainable finance as its innovative twin-bond structure finally made it possible to measure the elusive green premium or “greenium” in a benchmark deal that also created a liquid green curve as a reference rate for European markets.
The ability to clearly show the price advantage of issuing green debt has forever changed the dialogue with investors, and creating a liquid curve will have long-lasting implications for markets and central banks as the greening of the financial system continues.
“The way that Germany approached it was not to come to the green market, but to bring the green market to the entire capital markets by providing a liquid curve,” said Hugues Delafon, a managing director for sustainable banking at Credit Agricole CIB, which was mandated by the Ministry of Finance as sole structuring adviser.
A benchmark transaction from an issuer of Germany’s status was always going to get the market’s attention, but its twin bond structure was an innovative and ambitious development.
Although the greenium had been much debated in the course of 2020, no borrower had issued conventional and green bonds simultaneously with the same terms to allow a direct comparison that would conclusively prove its existence and set a new benchmark for pricing green deals.
Germany settled on the twin bond structure after a well-organised, systematic and highly collaborative process between ministries and opted to issue in a syndicated format.
The structure created twin green and conventional securities with identical maturities and coupons (although not issue size), which gave a clear insight into the price differential between conventional and green bonds and investor appetite for different maturities. The interchangeability of the two ensured liquidity.
“Germany’s transaction is the scientific demonstration of the greenium,” said Eric Busnel, deputy head of SSA origination at CA-CIB.
The deal was ready to launch in the second quarter, but Germany decided to wait until after summer as Covid-19 continued to buffet the markets. Leads Barclays, Credit Agricole, Commerzbank, Deutsche Bank, JP Morgan and UniCredit started marketing the August 2030 green transaction flat to Germany's conventional August 2030 in early September.
More than €33bn of demand helped Germany to move the level to 1bp tighter than the conventional Bund, erasing all new issue premium and pricing through the conventional curve. Remarkably only one investor out of 300 dropped out as a result.
Germany's debt agency Finanzagentur retained €500m of the deal, which tightened in secondary trading, highlighting market acceptance of the format that was used again on November 4.
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