International investors mustered more than US$14bn of demand last week as Israel and the country’s largest lender, Bank Leumi, both made their debut in the green bond market. Strikingly, buyers of the sovereign bond even included a handful of Arab institutions.
With only one green bond sold from the country previously, the deals signal a new push by Israeli credits for green funding, bankers involved said.
“The door has been opened now,” said Alexis Taffin de Tilques, head of CEEMEA capital markets at BNP Paribas. “It's certainly a very interesting development.”
“I think we are going to see more Israeli green bonds,” added Philip Brown, global head of sustainable debt capital markets at Citigroup, citing cross-party support in the country for decarbonisation.
Absent until now – though Teva Pharmaceutical Industries issued a landmark US$5bn sustainability-linked bond in November 2021 – corporates are likely to feature prominently in the green push. One banker reported having pitched a green financing framework to one Israeli company as the new issues emerged.
The new push comes as Israel finalises both its own taxonomy of sustainable activities – based closely on the European Union’s list – and a climate law. This will enshrine its 2050 net-zero commitments, though it is unclear if it will toughen the national action plan’s 27% and 85% emissions reduction targets by 2030 and 2050, respectively.
Having been absent from the US dollar market for nearly three years, the split-rated sovereign (A1 positive/AA–/A+) channelled pent-up demand as well as green novelty into its US$2bn 10-year. It had prepared the ground with a roadshow last month in Europe and the US for its new green bond framework and holding calls with global investors.
Besides fossil fuel, waste to landfill and pure internal combustion engine projects, the framework explicitly excludes spending on weapons. Moreover, Israel commits to report on ESG controversies and issues – though only “where feasible and relevant”.
Cicero Shades of Green (now part of S&P) gave the framework its top “Dark Green” rating.
Only the second sovereign green bond from the Middle East, following Egypt’s inaugural in September 2020, the deal was more than six times subscribed with total orders exceeding US$12bn. Israel priced it at 95bp over the comparable US Treasury – 35bp tighter than initial price thoughts.
Although US investors dominated the order book, more than 300 accounts in some 40 countries participated. As well as a high proportion of official institutions, they included new investors to Israel and additional portfolios (mainly ESG) from some existing holders.
“Israel is really proud to have joined 24 other countries with a rare landmark transaction, a green bond. It really showcases all the actions that the government has taken over the last few years with the climate change challenge,” said Gil Cohen, senior deputy accountant general at the Ministry of Finance.
Officials reported “massive demand” for the deal.
Some market participants saw pricing representing a 5bp greenium over conventional debt. Philip Fielding, co-head of emerging markets debt at investment manager MacKay Shields, said the 100bp–105bp IPT spread was “very close to an interpolated point between the closest bonds to the new issue”.
Similarly, one banker close to the deal put fair value at 100bp, though another source estimated it at 85bp–90bp.
The main use of proceeds will be clean transport, such as light rail. Major projects are under way in Jerusalem and Tel Aviv.
A green benchmark in euros may follow next year. The sovereign is seeking to alternate its one international deal a year between the two major currencies.
One day later a US$500m green 10.5-year non-call 5.5 Tier 2 offering from Bank Leumi expanded the new supply. Saleable to qualified US institutions under Rule 144A, it attracted total demand of some US$1.8bn.
That enabled pricing at 345bp over Treasuries – a tightening of 30bp from IPTs.
The issuer aims to increase its green financing and investment to NIS35bn (US$10bn) by 2030, while reducing its greenhouse gas emissions by 20% by 2026 from 2021 levels.
S&P affirmed that Leumi’s framework is aligned with ICMA's Green Bond Principles. The second-party opinion party provider judged the bank’s use-of-proceeds commitment as “strong”.
The deal followed US$1bn of dated green sub debt from rival Bank Hapoalim in October 2021, which earned the Climate Bonds Initiative’s “Green Market Pioneer” award.
Hapoalim issued its first green bond impact report in September. This revealed that it had only allocated 63% of proceeds at the time – largely on solar and wind projects, though it has also funded clean transport, waste sorting and treatment, and green buildings.
Citigroup was green structuring bank on both new issues. BNP Paribas shared the role for the sovereign, while Barclays and Bank of America were also joint bookrunners alongside the structuring pair.
Citigroup was also global coordinator and joint bookrunner for Bank Leumi. Barclays, Jefferies, JP Morgan and UBS were joint bookrunners too. Leumi Partners was local distributor.