Airport Authority HK sells controversial green bond

7 min read
Emerging Markets, Asia
Morgan Davis, Kit Yin Boey

Airport Authority Hong Kong sold US$4bn of bonds on Wednesday, its largest transaction to date, but its debut green notes raised questions for investors concerned about the environmental impact of building a new runway.

The government-owned airport operator and developer's jumbo 144A/Reg S senior unsecured issuance was a success in terms of size and pricing, bankers on the deal said.

The US$1bn five-year 1.75% green tranche was priced at Treasuries plus 42.5bp, the US$1.2bn 10-year 2.5% tranche at plus 80bp, the US$1.2bn 30-year 3.25% tranche at plus 120bp, and the US$600m 40-year 3.5% tranche at plus 140bp. The five-year bonds were priced about 5bp inside fair value, the 10-year was flat to fair value and the 30-year and 40-year bonds paid about 5bp of premium, by one banker's estimates.

Initial price guidance for the respective tranches was shown at Treasuries plus 80bp, 110bp, 145bp and 170bp areas.

But the trade took some negotiation, as critics argued that the ESG angle was incompatible with AAHK's expansion plans.

The proceeds from the green tranche are earmarked for financing or refinancing eligible green projects under the issuer's sustainable finance framework. Separately, the proceeds from the other tranches will be used to fund capital expenditure, including a proposed third runway, and for general corporate purposes.

Reclaim Finance, a climate change think tank, published a critical analysis of the AAHK trade, pointing out that the expansion of the airport through its third runway project, scheduled for completion in 2024, will have massive environmental impacts, including an increase in carbon emissions. The habitat of Hong Kong's 37 remaining Chinese white dolphins, in addition to other marine species, will be affected, the group claimed.

“The issuance of a green bond for such a devastating project might have been cleared for takeoff but the biodiversity and climate risks associated with the project speak for themselves: labelling this project as green is pure high-flying greenwashing," Lucie Pinson, director of Reclaim Finance, said in a press release.

Despite claims that airports are the antithesis of green borrowers because of the nature of their business, other airports around the world have successfully marketed ESG notes. Last year South Korea's Incheon International Airport sold a US dollar green bond, while Aeroporti di Roma issued sustainability-linked paper.

And AAHK's transaction ticked the necessary boxes. Sustainalytics issued a second-party opinion on the issuer’s sustainable finance framework and the notes obtained a Hong Kong Quality Assurance Agency Green and Sustainable Finance Certification Scheme pre-issuance stage certificate.

Bankers on the AAHK deal defended the structure of the trade, pointing out that the green bond proceeds will not be used for the controversial third runway project. "They are trying to invest in areas to mitigate the impact of their operations on the environment," said Alvin Yeo, executive director on UBS's Asia DCM syndicate team. "Air travel undeniably contributes to carbon emissions," but it is necessary, he added. "Demand for air travel is not driven by whether an airport operator ... constructs a new runway."

"Investors are curious to see how the overall green story (of AAHK) is coherent," said Yeo. "How investors evaluate it and got comfortable around it is that they have to look at the company's strategy, plan and commitment to reduce carbon emissions." The airport has committed to be carbon neutral by 2050.

Another banker on the deal said the evolution of the sustainable finance market means that there will be different views about how a transaction adheres to the spirit of sustainability. "There is no right or wrong; the market should debate that view," she said. Concerns that are raised can help create the best possible standards for the future, she added.

AAHK's transaction was in the works for about eight months, as the issuer met with investors to come up with a sustainable transaction that made sense, said the banker. The issuer discussed its sustainable finance framework, which allows for proceeds to be used for both green and social projects. Investors were not ready for the airport to issue a sustainable bond, the banker said, so the compromise was to use a green label for the transaction. The use of different tranches with different uses of proceeds also balanced the trade.

Clearly plenty of ESG investors agreed with the terms of AAHK's deal, as about 60% of the five-year notes went to ESG-aligned investors.

Distribution details

The five-year tranche drew over US$3.3bn of orders, including US$755m of interest from the joint bookrunners, from 130 accounts. Banks took 44%, official institutions 21%, private banks 1% and fund managers, insurers and corporates 34%. Asia accounted for 73%, EMEA 11% and the US 16%.

The 10-year tranche drew more than US$3.6bn of orders, including US$535m of JBR interest, from 180 accounts. Banks took 45%, official institutions 13%, private banks 1% and fund managers, insurers and corporates 41%. Asia accounted for 70%, EMEA 10% and the US 20%.

The 30-year tranche pulled in over US$2.8bn of orders, including US$40m of JBR interest, from 150 accounts. Banks took 3%, official institutions 6%, private banks 1% and fund managers, insurers and corporates 90%. Asia accounted for 50%, EMEA 12% and US 38%.

The 40-year tranche drew over US$1.5bn of orders from more than 110 accounts. No data on the JBR interest was given. Banks took 1%, official institutions 11%, private banks 1% and fund managers, insurers and corporates 87%. Asia accounted for 57%, EMEA 17% and the US 26%.

The notes are expected to be rated AA+ by S&P, in line with the issuer.

Bank of America, BNP Paribas, HSBC, JP Morgan, Standard Chartered and UBS were joint global coordinators as well as joint bookrunners and joint lead managers with ANZ, Barclays, Bank of China, Citigroup, Credit Suisse, Mizuho Securities and Morgan Stanley.

AAHK is a statutory corporation established in Hong Kong under the Airport Authority Ordinance and wholly owned by the Hong Kong government.

Updated story: adds banker comments