Participants in the supranational, sovereign and agency bond market are lamenting the dwindling of the greenium, even as it seems alive and well in the financial institutions and corporate bond markets. The divergence is caused by fluctuating levels of demand for green bonds of different types.
A representative of Germany's Finanzagentur expressed frustration last week at the Afme government bond conference at the small 0.5bp of greenium left on German green Bund issues this year. The official argued a higher reward was needed to justify the work it takes to prepare and execute a green bond deal.
But, since it is caused purely by supply and demand, the level of greenium — tighter pricing for securities perceived by investors as green — cannot be controlled.
“The actual outcome of whether there is a greenium or not is just down to the market,” said an environmental, social and governance specialist bond banker in London.
In the early years of the market in particular, there was often an undersupply of green bonds, while many funds were springing up that wanted to buy them. Therefore a greenium was frequently visible.
Governments pile in
Sovereign green bonds in particular only appeared at the end of 2016 with Poland's first deal, and remained rare for several years.
“There was a lot of demand for the green product, and with liquidity being the focus, the market welcomed the fact that sovereigns in particular were issuing green bonds,” said the ESG banker. “We used to see a reasonable greenium, which the sovereigns interpreted as a reward for the work that they put into the product.”
To issue green bonds, issuers need to put in place special governance arrangements and give investors extra transparency on how their money will be spent on sustainable projects. This costs the issuer time, and therefore money. So from its perspective, needing a reward to compensate makes sense, the banker added.
But the market has grown enormously in recent years, especially at the top end of the credit spectrum. Most governments now issue, as well as most state agencies and supranational organisations.
“With over $800bn of sustainable bond supply per annum since 2021, green bonds no longer have the rarity value which they had in the early years when the market was less established,” said Sanaa Mehra, EMEA head of sustainable debt capital markets at Citigroup in London.
Since SSA green bonds have become common, if an investor does not like the pricing of a green bond, it can afford to pass on it.
Under the microscope
There are only two issuers that give the opportunity to measure greeniums with scientific accuracy: Germany and Denmark, both of which issue their green bonds as "twins" of conventional bonds with identical maturity, interest payment dates and coupon.
“Recently, we have seen greeniums come down,” said Jens Bindslev Agerholm, principal portfolio manager at Danmarks Nationalbank, which issues debt for the Danish government. “Not many years back, we saw greeniums in general at 2bp-4bp, but recently many green bonds have been trading at a greenium of 0bp-1bp."
Denmark has experienced this trend, too. "Just a couple of months ago, we opened a new Danish 10 year green bond, which has been trading at around 1.5bp-2bp [inside the equivalent non-green bond]. This stands in contrast to our previous 10 year green benchmark, which opened a couple of years back at 5bp-6bp.”
Outside these laboratory conditions, the next best place to see the greenium is in the secondary market, especially in the curves of issuers with large numbers of liquid green and non-green bonds. However, secondary bond prices can be unreliable, with distortions caused by factors such as bonds being illiquid, or the level of coupon compared with present norms.
Tricky times
In the primary market, working out a greenium is always a matter of judicious estimating, rather than measuring.
The greenium can only be identified as the difference between the new issue premium an issuer pays on a green bond, compared with what it would have paid on an otherwise identical non-green bond issued at the same time.
Assessing that nearly always involves some speculation. That may be particularly the case in unsettled markets, such as those of today.
“In a difficult market, the new issue concession needed to clear a transaction is naturally larger than in a risk-on market environment,” said Mehra at Citi. “Sustainable bonds continue to attract larger orderbooks and may find a clearing level at a smaller concession than a non-labelled bond, but it's still a concession to the secondary market. In this environment its difficult to precisely decompose the concession to greenium versus overall market conditions.”
She added: “It's not that the greenium is gone completely. I think it's just difficult to quantify into basis points, and to tell an issuer 'you save X basis points if you issue green bonds'.”
FIG greens fly
While SSA issuers may be griping about the greenium at the moment, financial institution and corporate borrowers are still enjoying it.
Bank bond specialists say that in recent weeks there has been a clear trend that, at least for major European banks, a green label has given them a visible pricing advantage across the capital structure.
“It is more useful for an issuer to do an ESG deal in euros rather than dollars,” said Laurent Cote, global head of treasury at Crédit Agricole, which issued a very popular green bond this week. “There is more demand and more greenium” in euros, he added.
Crédit Agricole’s €1.25bn 4.375% 10 year senior non-preferred green bond, priced on Monday, was a prime example of the benefits of the label, according to bankers on and off the deal.
There was an astounding €5.7bn of demand, the largest order book for an unsecured FIG deal in euros this year. Not all of that was due to the green format, said Cote. The scarcity of the long tenor, CreditAg’s previous absence from senior euro issuance and the deal's timing all contributed. But Cote also said it was an “even rarer green deal after many years of absence from ESG issuance”.
The greenium was “difficult to assess directly,” he said. The deal would have been successful as a conventional 10 year note “given the timing we chose”. But he said there was “no doubt” extra demand because it was green.
“There was a boost in the size of the book and in the interest of investors, because of it being green, and that resulted in a tighter spread eventually,” said Cote.
Vincent Hoarau, head of FIG syndicate at Crédit Agricole, said: “When we increased the size from €1bn to the final €1.25bn, despite the deal being for a larger size now, the book increased... This was also due to the green element.”
Hoarau added: “My intimate feeling is that the green element [in pricing] was no less than 5bp, given the pricing achieved in the end, the book and the secondary performance that followed, which was telling too.”
The ones in demand
A green boost was also visible in Nordea Bank’s capital raising last week, when it issued the first green tier two in euros from a Nordic lender. The capped €500m 10.25 year non-call 5.25 tier two was priced flat to fair value.
The limited issue size from the onset and investors’ demand for higher yield helped, said a banker at one of the leads, but he added that “greenium is back, at least in the FIG market”.
He said the 30bp price compression from initial guidance was partly thanks to the label.
While the oversupplied euro covered bond market has been struggling ever since the end of the summer, a recent duo of deals demonstrated how a green use of proceeds can play a role in successful issuance.
On November 15, both Rabobank and Muenchener Hypothekenbank issued five year green covered bonds that were well received, allowing both to print their deals with slim concessions.
Rabo issued a €1.25bn trade at 20bp over mid-swaps with an order book of €2.2bn. MunHyp got more than €1.5bn of demand for its €500m no-grow deal at 19bp over.
In both cases, the deals had points of scarcity value, some of which related specifically to their green nature.
It was Rabo's debut green covered bond and its first sub-10 year public covered bond since 2017.
A banker on the deal pointed out “there is only one other green Benelux covered bond in the market," from NN Bank.
MunHyp’s deal was of limited size. It managed to price it with a fairly low new issue premium by recent standards of around 4bp-5bp, very similar to Rabobank.
That the greenium can be so clearly visible in the FIG market, just as its absence is being lamented by SSAs, is not surprising.
It can naturally be explained by green bond funds and other investors with a special appetite for green paper having a greater desire for FIG bonds at the moment than SSA ones.