The Republic of Indonesia waded into the blue bond market last week with a ¥104.8bn (US$757m) Samurai trade, making it the first Asian sovereign to complete such an offering.
The four-tranche transaction, rated Baa2/BBB/BBB, was split between a ¥46.9bn 0.74% three-year, ¥37.2bn 0.98% five-year, ¥14.7bn 1.20% seven-year and ¥6bn 1.43% 10-year, with the seven and 10-year portions carrying blue labels. The spreads over the respective Tonar mid-swaps are 60bp, 72bp, 80bp and 85bp.
The sovereign started marketing on Tuesday with initial price guidance of 55bp–60bp, 70bp–75bp, 75bp–80bp and 80bp–85bp. The guidance was revised to 58bp–60bp, 70bp–72bp, 78bp–80bp, and 83bp–85bp on Wednesday before being finalised at the eventual pricing levels later in the day.
The sovereign was also marketing 15 and 20-year tranches, both with blue labels, at 90bp–95bp and 105bp–110bp and set final guidance at 90bp and 105bp on Wednesday night but dropped them before pricing.
Daiwa, Mitsubishi UFJ Morgan Stanley, Mizuho and Nikko were lead managers on the deal.
Indonesia’s deal is one of only a few blue bonds in Asia so far, after the Republic of the Seychelles sold the world's first sovereign blue bond in 2018.
For example, earlier this year, the Export-Import Bank of Korea sold South Korea’s first offshore blue bond. In late 2022, the Chinese city of Shenzhen and the province of Hainan each sold blue Dim Sum bonds.
The proceeds from blue bonds, which are technically a type of green bond, are generally used for ocean-related projects. These are particularly relevant for the many island nations and countries with long coastlines in Asia. But eligible projects can vary from ecosystem management and restoration to wastewater and sanitation.
Alexandra Tracy, president of ESG consultancy Hoi Ping Ventures, said there is an overlap between some green and blue projects, but the use of the blue label can bring much needed funds to specific areas.
“Large percentages of the populations [in Asia] are dependent on oceans for livelihoods,” said Tracy. “There is a lot of capital that needs to be scaled up.”
The use of a blue label can draw investor interest as well, as it offers a focus on specific projects. Tracy noted that Japanese investors have been keen to buy into the Asian Development Bank's blue bonds, which could have influenced Indonesia’s decision to sell its notes in yen. Dai-chi Life Insurance, for instance, snapped up a A$208m (US$151m at the time) 15-year ADB blue deal sold in 2021. Meiji Yasuda Life Insurance took the NZ$217m (also US$151m then) 10-year blue tranche of the same trade, which funded ocean-related projects.
Maruha Nichiro, a canned fish company, sold Japan’s first domestic blue bond in October 2022, raising ¥5bn.
Nneka Chike-Obi, head of APAC ESG ratings and research at Sustainable Fitch, said the potential for blue issuance in Asia Pacific is “significant”.
“Governments and supranationals are best placed to issue blue bonds, given the relatively small impact that individual companies have on the marine environment,” she said. “Many blue activities are not revenue-generating, so require an issuer that has alternative revenue streams, such as taxation, to repay the bond.”
Going beyond green
When the blue bond label was first used, there was some debate in the market as to whether it was necessary. For many traditional green investors, having the green label alone was sufficient. But support for having an explicit blue label has grown, as has the addition of other more specific labels, such as orange bonds for gender projects.
“The benefit of the label is to raise awareness of the specificities of the bond’s use of proceeds and attract investors seeking exposure to this area of environmental impact,” said Chike-Obi. “One reason for the lack of APAC blue sovereign bonds is the ability to identify enough eligible projects within a standalone bond offering.”
Some borrowers have included blue uses of proceeds in their sustainable bond frameworks, but are yet to sell blue bonds, which require all the proceeds be used for blue activities. For instance, New Zealand sold its first sovereign green bond last year, under a framework that mentions aquatic biodiversity.
Indonesia initially used the green label in its bond framework, and sold its first green sukuk in 2018. In August 2021, the government created a Sustainable Development Goals framework that allows for the issuance of blue notes. The framework thoroughly explains how the sovereign can raise blue funds, going so far as to break down projects as “navy blue,” or high relevance projects, and “sapphire blue,” or moderate relevance.
“Indonesia is a nation that pays attention to lives below the water, as well as the communities impacted by the blue economy,” said a banker.
The banker said the acceptance of blue and other labels has grown with the SRI market. As more investors and issuers have dipped into the space, there has been more interest in specific labels that can offer clarity in a market that is becoming wider and more diverse.
“Investor receptiveness of blue is actually pretty high,” said the banker. “Blue is about ocean protection … but it's actually closely linked with many other green things.” She said a blue label would garner strong demand in Japan.
While there have not been many blue bonds sold yet in Asia, market participants are hopeful that more will come. The governments of Fiji and the Maldives are among those looking at issuing. The 39-member Alliance of Small Island States, an intergovernmental organisation established in 1990, is also working to draw more funding to areas that are being hit the hardest by climate change.
“The more familiarity there is … I think we will see quite a similar trajectory to the way green bonds have developed,” said Hoi Ping's Tracy.
Refiled story: Fixes number of Small Island States