Green bonds blossom: from Europe to China to the $3.7 trillion US muni market

Green bonds blossom: from Europe to China to the $3.7 trillion US muni market

Green bonds are blossoming: $15.7 million of them were issued last quarter, according to figures just published by the Climate Bonds Initiative, the international, investor-focused not-for-profit. 

The range is global. In Europe, Sweden’s largest municipal lender Kommuninvest leapt into the market with the largest issuance at $600 million, while a third green bond – this time one billion U.S. dollars rather than Euros - was issued by the Dutch public sector lender Nederlandse Waterschapsbank (NWB Bank). China has launched a pilot program for green corporate bonds to be traded on the Shanghai Stock exchange, while the muni market in the U.S. is gaining momentum with four incoming issuances and a rule change that could make a big difference.

Kommunivest’s inaugural green bond marks the largest Nordic issue yet ($600 million, 3years, 1.5 percent S/A, Aaa by Moody’s). Bank of America Merrill Lynch, Crédit Agricole CIB and SEB were lead underwriters for the deal.The issue received very strong investor interest and the books exceeded $850 million, which led to the upsize of the final issuance to $600 million. 

In terms of investor breakdown, central banks and official institutions accounted for 37 percent, asset managers 29 percent, banks 19 percent, pension and insurance funds 12 percent. Geographically, the largest portion of 30 percent was placed into the U.S. investor base, 26 percent into Nordics, 24 percent in the Middle East and Africa, 13 percent into the rest of Europe and the final 7 percent into Asia, says Climate Bonds. 

NWB Bank, returning to the green bond market after issuing 1 billion euros in 2015, but this time choosing U.S. dollars, found that within two hours of the books opening its green bond orders exceeded $1.5 billion. The annual coupon on this bond is 2.375 percent and the bond is rated Aaa by Moody’s. Bank of America Merrill Lynch, Daiwa, Deutsche Bank and SEB were joint book runners for the deal. 

But although NWB issued its bond in U.S. dollars, only 13 percent of investors were from the United States. The bulk – 62 percent, were from Japan, a further 22 percent from EMEA, and 3 percent from Asia. Over half of all investors were fund managers or insurance funds with the remaining allocation made up of central banks (24 percent) and banks (20 percent). 

In the United States, rule changes finalized last week by the Federal Reserve’s board will allow banks to count municipal debt towards their reserves. While so-called “muni bonds” will only be included in the lowest of three tiers of quality — alongside certain corporate bonds — “the decision is a welcome move for U.S. municipalities who will now find readier buyers of their debt,” said the Financial Times (FT). 

Green bond issuance coming up: Indiana Finance Authority is set to issue approximately $125 million state revolving fund (SRF) program bonds (series 2016A) and $72.8 million SRF program refunding bonds (series 2016B). California's state infrastructure bank is set to issue a green bond for water projects and the city of St. Paul, Minnesota is coming back again with a new issue to reach financial close in mid-April. 

Marking World Water Day at the White House on Mar. 22 San Francisco Public Utility Commission announced it plans to issue a second green bond, which will be certified under the newly-launched Climate Bonds Standard for water

The importance of the muni bond market “is reflected by the fact that muni bonds are typically tax-exempt for U.S. investors, helping whet appetite for the securities,” said the FT. 

Dina Medland is an independent writer, editor and commentator with a strong focus on issues around corporate governance, ethics, the workings of the boardroom and sustainable business. She is on the team of contributors to @ForbesEurope and is an ex-Financial Times staff member who has been a regular contributor in recent years. Further details about her background and a portfolio of work – including her commercially sponsored blog ‘Board Talk’ are available on her website http://www.dinamedland.com. 

Originally published on April 7, 2016