Austria poised to pioneer green sovereign CP

IFR 2468 - 28 Jan 2023 - 03 Feb 2023
5 min read
EMEA
Julian Lewis

Having pioneered green Treasury bills late last year, Austria is poised to break further ground in short-term debt by issuing the sovereign sector’s first green commercial paper.

Initial feedback from money market funds, central banks and other major short-term accounts has been supportive, reflecting their increasing focus on ESG. “There is a clear positive signal that we should use this programme in addition to our green Treasury bill programme,” said Markus Stix, managing director at the Austrian Treasury. “It looks that the demand is really good for such a product.”

An inaugural deal could come soon after the Treasury begins its regular quarterly auctions of green bills on February 21. However, it may not emerge until the finance ministry confirms eligible green expenditures for this year, which is likely to be in the second quarter.

The EU member state had €5.1bn of eligible expenditures last year. It funded these through the €4bn inaugural green bond in May, its landmark €1bn bills offering in October and a €100m two-tranche green loan from a domestic insurer.

It has previously indicated that this year’s eligible expenditures could come in at €5.4bn. That figure is set to rise by up to €4bn a year in the medium term, moreover, as the Treasury begins to fund back-to-back loans to regional governments and their affiliates for green projects. Currently, it only funds the federal government's green spending – mainly on clean transport.

Further innovation

Against this backdrop and having committed – uniquely – to fund 20% of its total green requirement through short-term debt every year, the Treasury is readying a second innovative money market instrument for its arsenal.

While it could simply schedule additional green T-bill auctions, it has a “clear” strategic goal of making a green product available to CP investors, according to Stix.

The Treasury will determine its target currencies, maturities and volumes during the first quarter. It has already held virtual meetings with investors but will now step up its “interaction with the community”, including its 16 domestic and international CP dealers, to gauge demand.

“We look forward to discussions with investors to see where the demand is and in which maturity – is it more the one-month or more the 12-month period?” said Stix.

Under its CP programme, rated at S&P's highest short-term level (A1+/stable), Austria can issue English law notes in any currency. Available maturities range from seven to 364 days.

Nearly half its €14.2bn-equivalent outstanding is in US dollars. In contrast, its T-bills are Austrian law instruments offered only in euros. Including the green bill, outstandings are €7.4bn.

Roll-over commitment

Austria’s first green T-bill auction in October attracted €2.225bn of demand – a bid-to-cover ratio of 2.69 on the competitively-bid portion, compared with an average of 2.12 on conventional bills – and was priced at a greenium of 2bp.

This success “showcases that there is demand for short-term ESG-relevant paper”, said Antonio Keglevich, vice-chairman of sustainable finance advisory at UniCredit.

The sovereign will roll over its T-bill and CP outstandings as long as it has term green debt outstanding. This commitment makes short-term debt a core part of Austria’s green funding and sidesteps the traditional objection that it is unsuitable for funding long-term investments needed for climate change adaptation and mitigation.

Austria expects to reduce its conventional T-bill and CP outstandings as the green versions grow. The 20% undertaking means that the latter will gain €1bn a year even in the unlikely event that eligible expenditure stays unchanged.

“Over time, the share of green bill/CPs of the total outstanding volume of short-term instruments is expected to increase,” Stix said.

The sovereign’s arrival will boost the development of use-of-proceeds CP significantly. While short-term ESG debt has seen notable growth in recent years, much of this has been in sustainability-linked structures, although France’s SNCF supplied a rare use-of-proceeds issue in late 2021.

Austria is also set to decide on its green bond approach this year. With at least €4bn of eligible expenditure available, it could take several routes: use the entire amount on opening a new green line; boost the existing line through one or more auctioned or syndicated taps; or some combination of the two.

A €1bn tap would take the 2049 bond to €5bn – a threshold size for trading platforms – while leaving at least €3bn for a new green benchmark.