The UK Debt Management Office moved the goalposts for green issuance last week as it received a rousing response for a debut green Gilt that broke records for size, demand and pricing in the asset class.
Leads Barclays, BNP Paribas, Citigroup, Deutsche Bank, HSBC and JP Morgan opened books on Tuesday morning with guidance for the 0.875% July 2033 benchmark at 7.5bp–8.5bp over the 4.25% June 2032 Gilt. In typical DMO style, the spread was set at plus 7.5bp a mere 30 minutes later. It went on to launch the issue at £10bn, with final demand at more than £100bn, including £10bn of joint lead manager interest.
"This is not only a record book for a UK DMO syndication by some considerable margin but it's also the largest-ever green order book and shows the huge appetite for green sterling assets," said Asif Sherani, head of DCM syndicate EMEA at HSBC.
"At £10bn, it's the largest-ever sovereign green bond, and while the UK could have printed considerably more, they were limited in terms of size. The ESG angle added demand, both from an international and domestic perspective."
The order book beat Italy's green debut in March when demand was more than €80bn. The deal also eclipsed the UK DMO's own record – the £82.6bn book for last year's £12bn October 2030s.
"The deal size came in at the upper end of expectations at £10bn. Taking into account the huge demand, the slim allocations (relative to a brown Gilt syndication), we expect this Gilt to perform well in the coming days and months," said Matthew Amis, investment director at ASI. "This will be aided by no further issuance of this 10-year green Gilt until Q1."
The trade also set a new high mark for the greenium. At 7.5bp over the June 2032 Gilt, Sherani said the issuer had achieved a 2.5bp greenium based on an interpolation of where the UK's on-the-run 2031 and 2035 bonds are trading.
"One of the previous stumbling blocks is that we wanted to be sure as much as we could be that we could achieve value for money for the UK taxpayer," said Robert Stheeman, chief executive of the UK DMO.
"We feel that we have been able to achieve that in a very clear and unambiguous manner with this deal. At around 2.5bp, this is the largest-ever greenium by any sovereign for an inaugural offering."
It beat Germany's debut green bond last year, the first trade to clearly demonstrate the pricing advantage of green instruments versus conventional paper and the 2bp greenium the country achieved on a 30-year syndication earlier this year.
"They've got a huge reaction," another banker said. "We all hoped for this but you can never expect it; there is a distinct greenium here, the biggest we've ever seen."
"We congratulate the DMO on the successful introduction of a green Gilt into the UK Gilt market and expect future issuance of green Gilts as the UK looks to expand the scope of maturities available to investors seeking greener investments," Amis said.
Stheeman said that while the size of the book gave an indication of the significant demand and momentum behind the transaction, the true mark of the deal's success was the diversity in orders. "There were genuine new investors who had previously not appeared in a Gilt order book. We genuinely didn't set out to do a £10bn trade but under the circumstances felt this was appropriate."
Another at least £5bn of green Gilts are due to be issued by March 31.
The transaction has emerged just a few weeks ahead of the UN’s COP26 climate meeting in Glasgow at the beginning of November.
Despite its ambitions to be a green leader, the UK has until now lagged behind with the US$9.84bn of green issuance in total printed from the country in 2021, excluding supranationals, less than a quarter of that from Germany.
Sherani said the trade was a game-changer for the UK green bond market. "We've had issuance but it's been limited, and nothing in this quantum. The fact that the UK government has now done a green bond will push other issuers to look at the market more seriously and encourage others to come."
The UK's commitment to net-zero emissions by 2035, however, is one of the most ambitious medium-term targets globally and its disclosure regime, which includes mandatory implementation of the Taskforce for Climate-Related Financial Disclosure, is also world-leading.
"What matters to us is the use of proceeds," Amis said. "In this case we are encouraged by the creation of a separate General Account by HM Treasury where the proceeds will be held and tracked. Information contained with the Green Register also allows investors to track expenditure towards eligible investments.”
Heat over hydrogen
The deal’s triumph came despite the UK’s decision to treat investments in controversial blue hydrogen as eligible under its framework, leading some dedicated ESG investors, such as Triodos Investment Management, to spurn it. This reflects “huge sensitivity around fossil fuel lock-in”, a lead manager acknowledged.
Government policy is a twin-track approach to support large-scale production of both green hydrogen, produced using electrolysis powered by renewable energy, and blue hydrogen, produced from LNG with emissions captured and stored underground.
The UK stance on blue hydrogen contrasts with that of peers such as Germany and the EU.
However, the UK is more in line with peers by excluding nuclear power from its framework. This is despite government policy being to support an expansion of nuclear, which the Johnson administration’s November 2020 Ten Point Plan for a Green Industrial Revolution terms “a reliable source of low-carbon electricity”. But, like green bond pioneer France (another strong nuclear advocate), it bowed to investor pressure on this point.
The deal also benefited from investors’ positive view of the framework, according to the lead manager. Both its very limited look-back provision, which only allows prior green expenditures from the past year when two years has been considered best practice, and its reporting of social co-benefits of this spending are innovations for the sovereign market.