Austrian utility Verbund broke new ground in European ESG financing on Wednesday, issuing the first bond combining green use-of-proceeds and the increasingly popular structure of sustainability-linked coupon step-ups.
While a couple of issuers outside of the euro market have tested the concept in other funding markets, this was the first time any corporate had done so in euros.
“We do like the concept of combining the use-of-proceeds concept with the sustainability-linked concept. This aligns the short-term capex/projects financed with the long-term issuer’s commitment,” said Bram Bos, lead portfolio manager of green bonds at NN Investment Partners.
He also said the fact that the new bond is aligned with the ICMA Green Bond Principles, the EU Green Bond Standard and the EU Taxonomy was also appealing.
“There are several taxonomies and guidelines on how green projects should be defined and selected. For the sustainability-linked structure there is less clarity on how ‘ambitious’ goals should be defined as there are no international standards and taxonomies for this,” said Bos.
So "paired with a green bond that is highly aligned with the EU Taxonomy, they are able to connect a sustainability-linked bond to the EU Taxonomy, which most regular SLBs are not able to do.
"Still, we do think that the use-of-proceeds concept is most important for investors, as it gives investors more transparency and gives proof on how an issuer is spending its capex,” he said.
Leads said Verbund (A3/A) was the perfect candidate to become the first European issuer to combine a green structure with KPI-linked targets through the €500m 20-year bond.
“This is an issuer that wants to be an innovator in the sustainable finance market. It is already an experienced issuer of green bonds. This presents an opportunity to refresh the offering,” said a DCM banker involved.
The bond is linked to two renewable energy focused targets, with a 25bp step-up penalty if either is missed.
The company must install production capacity of hydropower, wind power and photovoltaic solar renewable energy of at least 2GW by the end of 2032 and install transformer capacity of at least 12 gigavolt-amps to facilitate interaction with the grid and integrate renewable energy generation over the same period.
The green side of the structure is also related to renewable energy projects, such as investing in hydroelectricity and improving the power distribution network.
Tight price
Given that ESG-related deals are, on average, pricing with lower new issue concessions compared with conventional bonds and often through the fair value of conventional bond curves entirely, investors were expecting to be left little on the table, if anything. The no-grow aspect of the trade also played in Verbund's favour.
“This bond is going to be expensive,” wrote CreditSights analysts ahead of IPTs. “But the company is a legitimate green issuer, it is looking to grow its renewable capacity, and it is one of the lowest emitters in the European utility space. We can see the appeal.”
So it proved. With the book over €2.2bn, leads launched the note at 57bp over swaps after starting marketing at 85bp area.
Bankers were reluctant to put a figure on fair value given Verbund has only one outstanding bond - €500m 1.5% November 2024s, which were bid at plus 28bp - and this instrument is the first of its kind in the euro market. Leads did also look at other utilities such as French electricity network operator RTE and Germany's Vier Gas Transport, but there was nothing directly comparable.
CreditSights suggested fair value was anything from 50bp-60bp.
Away from the ESG angle, the deal was incongruent with what investors have been targeting of late - spread products or shorter-dated tenors - but leads said the book size was solid. Verbund's choice of tenor was dictated by the needs of the underlying project.
The company has been considered something of a green ‘pure play’ by bankers and investors for some time. About 94% of all the energy it produces is from hydro power. It also generates energy through wind and solar.
ESG is also at the core of the company’s financing. The borrower issued its first green bond in 2014 – the November 2024s – and has also raised green debt in the Schuldschein market and secured an ESG-linked syndicated loan. Verbund does not have particularly large funding needs, and the 2014 green bond was its last appearance in the market.
Although this is the first time Europe has seen the combination of ESG use-of-proceeds and a KPI-linked structure, it is not the first for the bond market. In January, Japan's Takamatsu Construction Group announced that it would sell a ¥10bn (US$97m) five-year sustainability-linked green bond.
The bond was only issued last Friday, and Takamatsu will use the proceeds to fund the construction of a new environmentally friendly headquarters in Tokyo.
And last year, UAE airline Etihad issued US$600m five-year sustainability-linked transition sukuk. Etihad's framework allows it to issue either project-specific use-of-proceeds deals, or sustainability-linked instruments.
Bank of America and JP Morgan were ESG structuring agents and bookrunners on Verbund's deal alongside Erste Group, Morgan Stanley and Societe Generale