China's efforts to develop a sustainable green bond market are starting to put much of the rest of Asia to shame as a debut international green bond by Three Gorges Corporation this Wednesday adds another notch to the country's tally.
So far this year, Chinese entities have accounted for 91.25% of Asia's $8.147 billion green bond issuance according to Dealogic data. This is an even higher ratio than 2016, when the country's issuers accounted for 87.56%.
Second is India on 6.78% and behind that, the rest of Asia on 2.2%. This latter figure includes the Asian Development Bank, two Taiwanese banks and one solitary issue from Singapore: an S$100 million ($66 million) transaction by CDL Properties.
Asean-based issuance has been conspicuous by its absence since the market took its first steps back in 2013. Sean Kidney, CEO and founder of the London-based Climate Bonds Initiative urged for change and more creative thinking at FinanceAsia's recent Green Bond Conference in Singapore.
Chinese issuance has been government-led and in both 2016 and 2017, financial institutions dominate the league tables. This year, they have accounted for 11 out of the region's 32 offerings.
However, issuance is well down on 2016 and the region still has a long way to go if it is to match 2016's $37.77 billion total according to Dealogic figures.
Diversifying its investor base
Three Gorges went some way to rectifying that and is deal has helped build the market in a number of ways. For the bond's largely European investor base, it added diversification away from a heavy weighting of European banks and power companies.
As a result, it also helped Three Gorges reach a wider number of investors. The deal's seven-year tenor also lengthened the maturity spectrum for Chinese euro-denominated issuers, which typically set five-year benchmarks.
Three Gorges has issued one euro-denominated bond before and this provided the main comparable for the new deal, although bankers were keen to emphasise it is extremely illiquid.
The new A1/A+/A+ rated deal was priced at 99.967% on a coupon of 1.3% to yield 93bp over mid-swaps, or 150.7bp over Bunds.
Bankers said the existing €700 million 1.7% June 2002 deal has traded up about four points over the past two years. It was being quoted at 86bp over mid-swaps just before the new deal was announced.
Based on the pricing spread, this means the new deal offered a 7bp pick up for the two-year maturity extension.
Three Gorges has a reputation for seeing extremely aggressive pricing and bankers acknowledged it priced at fair value. When it broke syndicate it traded tighter by a couple of basis points against bunds to 149bp.
Green bond proponents have sometimes claimed the market's supply/demand imbalance creates a pricing advantage for those issuers, which chose the format over conventional bonds. Resent research has suggested this is unlikely to be the case, despite the fact that green bond funds do not yet have enough supply to meet their mandates.
However, the distribution stats for Three Gorges deal do show that it reached a different audience compared to its last outing in June 2015 and higher demand too.
Last time round, it reported a final order book of €1.43 billion. This time, it did not release the stats for the final order book, but demand stood at €2 billion when revised guidance was released.
Bankers said it was hard to estimate how much demand came from green-related funds, but funds overall took a much larger portion of the 2017 deal than they did in 2015, which suggest a fair slug did participate.
Final distribution stats show 59% went to funds, 24% to banks, 6% to official institutions, 6% to insurers and 5% to other. Last time, banks dominated on 45% (most probably the European-offshoots of Mainland entities), followed by funds on 40%, hedge funds 8% and insurers and pension funds 7%.
By geography, the new Reg S deal had a split of Europe 56% and Asia 43%. This broke down to Singapore 20%, Switzerland 18%, China 15%, Germany/Austria 9%, Hong Kong 8%, UK 8%, Iberia 8%, Nordic countries 6%, France 4%, Benelux 3% and other 1%.
How green is green?
EY provided the independent review certifying that use of funds are green, as it previously did last August for the group’s debut Rmb6 billion green bond offering.
This latter deal, however, was not without its complications given the controversy surrounding the construction of the world’s largest hydropower project and the displacement of thousands of people.
The London-based Climate Bond Initiative does not include the local currency bond in its data for a number of reasons. These include the fact the project produces methane-based green house gases as a result of organic matter rotting since the reservoirs were flooded.
But the bond did meet the Chinese government’s eligibility criteria and Three Gorges was included in its catalogue of endorsed projects. This list has confused some international investors since it includes projects, which they do not deem green such as coal-fired power stations - the government included them because they’re replacing older more toxic plants.
However, Climate Bond Initiative’s Kidney said the new euro-denominated deal “fits beautifully” with the NGO’s criteria.
Proceeds are being used to develop the Three Gorge’s European sustainable projects. At the end of 2016, it reported that 26% of its 69GW of installed capacity came from its international portfolio.
One other key requirement for green issuers is ongoing reporting over use of funds, though in Three Gorges case this is also somewhat complicated by the fact that its corporate website does not appear to work.
Joint global co-ordinators for the bond deal were: Deutsche Bank, JP Morgan and Bank of China. Joint bookrunners were UBS, ICBC, Standard Chartered, Natixis and CCBI, with Citic CLSA and DBS as co-managers.