• Global Capital Markets

Green Bonds Take Root

New varieties of green bonds are sprouting up in unexpected places, as deal volume hits a new record.

Only a few years ago green bonds were a novelty in the global capital markets. Apart from development banks and frequent borrowers on the lookout for ways to tap new investors, most corporates saw neither the need nor the advantage of issuing bonds whose proceeds must be tied to environmental projects.

That’s no longer the case. Investor demand for sustainable products is driving an ever-expanding range of borrowers with different kinds of projects for green designation, in an array of new structures and markets.

“The pace of issuance and the diversity of borrowers this year has shown that the green bond market has come of age,” says Andrew Salvoni, in Morgan Stanley’s London debt capital markets division. “Pre-2013 we had anywhere from $2-4 billion worth of issuance a year, and most of that was from supranational issuers. Now we’ve seen bespoke deals in asset backed securities and even green bonds in the Hong Kong Dim Sum market.”

A New Record

In a span of just two months in the third quarter, Morgan Stanley underwrote more than $3bn worth of green bonds issued by six borrowers, domiciled in three countries and issued in four different fixed income asset classes. Total green bond deal volume in the global markets for 2015 hit a new record of $39.5 billion by November, issued in 161 deals. That breaks the previous record in 2014 of almost $36.6 billion in 118 transactions.[1]

Driving the activity is a surge of sustainable and responsible investing (SRI) mandates and a need for greater diversification of borrower names for SRI portfolios.

“It makes sense that investors are looking for product from a more diverse range of issuers,” says Salvoni. “You don’t want your securities to be concentrated in just a handful of sectors and issuers.”

Deals underwritten by Morgan Stanley in October and November were as different as a $18.5 million municipal green bond deal by Saint Michael’s College in Vermont, to a benchmark dual currency green bond debut by the Agricultural Bank of China and a $1 billion global bond by German development bank KfW. The State-owned Agricultural Bank of China’s transaction is the first green bond by a Chinese financial institution. It was split into two dollar tranches worth $900m and one CNH600 million ($94 million) Chinese Yuan tranche, sold in Hong Kong’s Dim Sum bond market.

Increased Demand

"Utilizing Green Bonds is a win-win,” says Vermont State Treasurer, Beth Pearce, in a press release issued in October. The State of Vermont priced a debut $28.5 million deal in October which included Morgan Stanley as the senior manager. “They encourage the identification of sustainable infrastructure projects…. Use of the green bond designation expands the State's network of potential investors and results in an increased demand for our bonds.”

A wider variety of borrowers has meant a greater range of projects that investors will now accept as green. What were at the beginning obviously green projects like financings for wind and solar farms now include water management and forest conservation projects, on-campus residence halls using renewable energy, and consumer loans for energy efficient home appliances.

Different Structures

Different deal structures are also being welcomed. In November Morgan Stanley underwrote a $201.5 million asset-backed green securities issue by California-based Renovate America. The company provides financing to consumers of more than 50 categories of products that reduce energy use and conserve water, under a State public-private venture called Property Assessed Clean Energy (PACE) financing. Counties collect payments on the financing as part of a home-owner’s property taxes. Renovate America then takes those payments and securitizes them in an over-collateralized green bond issue.

“This is Renovate America’s fifth PACE securitization, but it’s the first time it has designated it a green bond,” says Ricardo Rodriguez in Morgan Stanley’s US capital markets group. “It’s a great sign that companies that never thought of doing a green bond are now actively embracing the designation as a way to enhance the attractiveness of their financing.”

[1] Source: Climate Bonds Initiative

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