Asia ex-China has been much slower than other parts of the world to adopt green principles. As such, the group’s $500 million FRN not only marks the first dollar-denominated green bond from Singapore, but also from the wider South East Asian region as well.
The bank’s status as a quasi-government proxy means its deal should serve as a key benchmark for other issuers thinking of tapping the offshore bond market and DBS hopes it will help to bolster Singapore’s efforts to become a green financing centre for the region.
The city state recently stepped up incentives to encourage greater issuance and DBS has become the first entity to take advantage of an S$100,000 ($73,169) government grant to cover the expense of getting a second opinion and pre-assurance report, in this case from Sustainalytics and EY respectively.
The reports certify that the bank’s Green Bond Framework meets the green bond principles set out by the International Capital Markets Association and are a pre-requisite for many green bond investors.
Clifford Lee, the bank’s head of fixed income, said DBS had been actively planning a bond since the first quarter.
"Our aim is to be best in class so that’s why it was very important to set up our own Green Bond Framework, as well as get a second opinion and pre-assurance report from two of the leading practitioners in the industry,” he commented. “Now we’ve established a foothold in the market, we’ll continue to apply those best in class principles in the future."
"The two caveats are that the market is evolving all the time and we need green projects to invest in,” he continued. “But we’re continuing to look for them and I’d hope we'll issue around one green bond per year in line with our European counterparts."
At FinanceAsia’s green bond conference in Singapore earlier this May, speakers urged South East Asian governments to do more to encourage green finance.
Moody’s vice-president Ray Tay said the Singapore government’s green bond grant represented a good first step to get the ball rolling, but argued that green thinking needs to shift up one level to project procurement across a range of industries including water, waste management and renewables: the sector which accounts for about 50% of global green bond proceeds.
Lee agrees and said the government’s green bond grant is a “good incentive and it all helps, although it’s unlikely that many issuers would base their decision on that alone.”
He also argued that, “it’s important to take into consideration the fact that parts of the region are still developing markets. Europe has set the lead for green financing and this is where we’re looking to see what practices we can apply here.
“One example of the kind of transactions we're considering are carbon-credit-structured bonds,” he noted.
The International Finance Corporation (IFC) set the lead in this area late last year when it issued the world’s first forests bond, using the proceeds to invest in forest protection. Investors had a number of options including receiving the coupon payments in cash, or carbon credits, which could either be retired to offset corporate greenhouse gas emissions, or sold in the carbon market.
Proceeds from the DBS five-year FRN are being used to fund a loan for the development of the building the bank is based in and owns one third of: Marina Bay Financial Centre Tower 3 development. One of Singapore’s Paris Agreement targets is to ensure that 80% of its buildings meet the Building and Construction Authority’s Green Mark certification.
Another is fitting 5,500 solar panels to government housing blocks by 2020 and reducing Singapore’s energy intensity to 35% below 2005 levels by 2030.
Lee said that one of the most pleasing aspects of the transaction was the high proportion of green bond investors who placed orders. This is a key consideration for many corporate treasurers since a wider and more diversified investor base can help to leverage pricing: in this case to 62bp over three- month Libor.
“Many people asked whether it was about cutting our cost of funding, but that wasn’t our primary goal,” Lee stated. “The financial and commercial aspects were secondary to promoting awareness of the green agenda across Asia as part of the UN’s Sustainable Development Goals.”
Distribution stats show that 70 accounts participated in the transaction and Lee estimated that roughly 50% of the paper went to green funds of one form or another; a very high proportion relative to other green bonds issued out of North Asia and China.
The detailed stats breakdown back this up with 41% placed in the US, 22% in Europe and 37% in Asia. By investor type, fund managers took 47%, banks 30%, central banks and agencies 9%, insurers and pension funds 6%, corporates 6% and private banks 2%.
The deal also had rarity value given DBS rasied $1.3 billion in senior debt and $1.2 bilion of capital during 2016. If the bank continues issuing around $500 million a year in green bonds, the latter will account for a significant portion of its overall wholesale fund raising activities.
Lee’s role also means he spends a fair proportion of his time sourcing bond mandates. His advice is to prospective borrowers is to, “go into the process for the right reasons and have a long-term plan in place to promote sustainable development rather than expecting a green bond to deliver a cost saving".
But he concluded that, “Once you know what aspect of green financing you want to focus on, then the technical aspects of putting a green bond together are not as difficult as you might fear and the costs are also less onerous.”