EIB issued an £800m five year Climate Awareness Bond (CAB) with a spread of 36bp over the September 2024 Gilt via Bank of America, Barclays and HSBC on Tuesday.
The leads began the price discovery process on Monday with initial price thoughts of plus 37bp area, before opening the books on Tuesday morning with guidance for EIB’s new CAB at the same level and more than £600m in indications of interest for a minimum deal size of £500m.
With the order book going over £1bn, the leads set the spread at plus 36bp and the deal was later launched for a size of £800m, making it the biggest ever sterling SRI SSA bond and the largest single tranche sterling SRI bond across any sector. Danish energy company Ørsted issued a £900m green bond in May, but that was across three tranches.
The final book for EIB’s deal closed at more than £1.4bn, excluding lead manager interest, which is also a record for the sterling SRI SSA bond market. Two-thirds of the allocation went to green investors.
“The recent announcement of the UK’s Green Finance Strategy provided a good backdrop,” said Aldo Romani, head of sustainability funding at the EIB. “The message from the investor community is clear: the sterling SRI bond market is here to stay and it is going to get larger.”
Last week, KfW issued its first green bond in sterling since 2015 with a £650m seven year green bond that was, until this week, the biggest SRI bond in the sterling SSA market.
“We were aware of the KfW transaction last week and we decided that it would not be good for the market to launch at the same time,” said Romani. “Instead, we expanded our dialogue with investors, putting our new sterling CAB in a broader strategic perspective. We were hoping for a significant confirmation of a trend.”
Pension reforms and banks drive demand
Both the leads and the borrower on the KfW deal said incoming UK pension fund reforms helped drive demand in the deal.
UK pension funds are under pressure to focus on environmental, social or governance (ESG) factors in their investments, as a result of incoming reforms. From October, UK pension schemes with 100 or more members will be required to produce a Statement of Investment Principles (SIP), setting out how they take account of ESG considerations, and this could spread to other institutional investors such as insurers.
But it is not just UK pensions that are driving demand into the sterling SRI bond market. There is also greater demand from bank treasuries and from Japanese investors, said Romani.
Banks and asset and liability management accounts took up the majority of the deal with 46% of the distribution, followed by pension, insurance and fund managers with 39%. Japanese investors took up 12% of the deal.
“The transaction and its use of clear taxonomy aligns well with the investment needs of a large green bank treasury portfolio, such as Barclays,” said Steve McDowell, head of treasury investment at Barclays. “The choice of sterling as the currency of issuance was timely given the increased focus in the UK on the development of green financing markets, but also crucially, for many investors, the large transaction size provides much needed liquidity to the sterling green bond market.”
EIB’s new five year CAB is the supranational’s second sterling SRI bond, following its debut in March 2014. That bond matures next year. It is also the first sterling bond linked to the European Union’s sustainability taxonomy.
“Something big is happening in the UK SRI bond market and the EIB always sees these things early,” said a head of SSA DCM at one of the leads on the EIB’s new sterling CAB. “There’s a bigger focus on green in the UK with things like the UK’s new Green Finance Institute and the UK pension fund reforms, which are going to catalyse a lot of green activity in the UK.”
In addition to bringing the largest ever single SRI bond in sterling, the EIB’s bond also brought sterling supply for supranationals and agencies to an all-time high.
Following EIB’s deal, year to date issuance in sterling from supranationals and agencies rose to £30.57bn, overtaking the previous record of £30.37bn, which was set in 2018, according to Dealogic data.
Brexit boost
Rather than hindering supply, the impending exit of the UK from the European Union and the uncertainties surrounding it have increased demand for sterling SSA bonds, according to market participants.
UK bank treasuries are boosting their liquidity reserves ahead of a potential hard Brexit — which has become more likely under the stewardship of prime minister Boris Johnson — under which access to EU funding markets might be disrupted.
Bank treasuries are therefore taking the opportunity to boost their liquidity buffers with as many high quality liquid assets as they can.
Other factors have also helped boost sterling SSA supply this year, including a favourable euro/sterling basis swap and the rapid development of Sonia-linked floating rate note issuance.
