Zhejiang Geely Holdings became the first Chinese car company to issue green bonds on Thursday, raising $400 million for a deal that finances its development of an environmentally friendly black cab in London.
The electrification of the global auto industry makes companies like Geely the perfect vehicle to further the development of a green bond market, which has been slow to get off the ground in Asia.
Earlier this week, FinanceAsia's inaugural Bond Investor Survey highlighted growing investor interest in the product.
A poll of 150 global fixed-income heads revealed that 55% expect to invest in green bonds within the next 12 months. However, their reception to Geely's bond shows Asia remains a work in progress.
A total of three green investors placed orders, according to syndicate bankers who described this as an improvement on the one fund that participated in Xinjiang Goldwind Science & Technology's debut green bond from China in July 2015. This deal was followed by a $1 billion offering from the Agricultural Bank of China in October 2015.
The Chinese government has ambitions to lead the world as a green bond advocate and its companies are generally setting a good example following the voluntary green bond guidelines established by a group of market participants and the London-based Climate Bonds Initiative.
Hence Geely has not shied away from paying for an independent second opinion from Deloitte, which certifies its use of proceeds.
It has also become the first green bond issuer to use a standby letter of credit (SBLC) to enhance its rating. In this instance, Bank of China London branch is providing the SBLC, giving the deal an A1/A/A level.
Geely Auto, by contrast, has a Ba2/BB+ rating.
Re-pricing the SBLC curve?
However, while the deal structure was environmentally friendly, the pricing was not very investor friendly, coming through even the tightest fair value estimates of non-syndicate brokers.
Indicative pricing for the five-year Reg S deal was initially pitched at 170bp over Treasuries before being tightened to between 140bp and 145bp over. Yet the aggressive 30bp tightening to a final issue price of 140bp over Treasuries did not appear to deter investors, with the order book closing at the $2.3 billion level.
Syndicate bankers said roughly 88% of the deal was placed into Asia and 54% to banks.
The bond was issued in the name of LTC Company Ltd with a keepwell deed from Zhejiang Geely. LTC stands for London Taxi Company, which Geely purchased in 2013 and manufactures the capital's distinctive black cabs.
Prior to the deal's completion, non-syndicate brokers estimated fair value anywhere between 145bp and 155bp over Treasuries. The wide range reflects the fact that, while SBLC deals currently average a 50bp premium to banks’ senior debt, individual bonds are trading all over the place.
This is because there have been few SBLC issues recently. Outstanding paper is also tightly held by Chinese banks.
Syndicate bankers argued this factor made secondary trading levels a poor indicator of where banks are prepared to buy deals in the primary market. They hope the deal will help to re-price the entire SBLC curve.
By way of comparison, the most recently issued SBLC deal is actually trading inside of Bank of China's senior debt according to one broker's prices.
In mid-January, for example, CNMC Capital International executed a $500 million 2.375% 2019 transaction on an issue price of 99.438%. This was trading Thursday on a bid/offer price of 100.76%/101.02% or a mid Z-spread of 92bp.
The same broker was quoting its SBLC issuer, Bank of China's 1.875% March 2019 deal on a mid Z-spread of 94bp.
Where Geely's green deal is concerned, the closest comparable is Bank of China's 2.375% March 2021 deal. This was trading on a mid G-spread of 118bp at Asia's close on Thursday, which means the new deal has offered a 22bp premium.
Geely Auto’s own $300 million 5.25% October 2019 bond was trading at 104.25% or a yield-to-call of 3.887% on Thursday. It has consistently tightened in since its 5.66% peak last August.
It also has call dates in 2017 and 2018.
Two further factors in Geely's favour were its market timing and Chinese banks' desire to pick up paper to display their environmental credentials to a government that has made green financing a priority.
The deal also benefited from a 2bp tightening across Chinese investment grade paper during the day as yield buyers moved in following hawkish comments from the Federal Reserve suggesting a new interest rate rise may be much sooner on the horizon than the financial markets have been expecting.
Autos go green
Geely subsidiary LTC is one of 14 companies developing zero-emission cabs in London. The £330 million project has been part-financed by a £170 million loan from the parent, which the new bond is re-financing.
The UK government has also provided a £30 million subsidy.
Transport for London has set a 2018 deadline to make all cabs zero-emission capable and Geely hopes to be rolling off its new model (based on an old 1958 design) in 2017. Known as the TX5, it was unveiled during Chinese President Xi Jinping’s visit to the UK last autumn.
Prior to Geely, Hyundai Capital launched Asia ex-Japan’s first car-related green bond in early March.
This $500 million 2.875% five-year deal attracted an order book of $1.2 billion, but very little paper was placed with dedicated green funds. On Thursday, it was trading on a mid-yield of 2.625%.