February is already a hectic month for green bonds with two large issuances this week from repeat issuer Norway’s KBN and the US State of Indiana. As well as new green bonds there have been market developments with Oslo officially launching its green bond list and German ESG research house Oekom Research announced it's developing a sustainability rating service for green bonds. With so much to cover – let’s start with our favourite fjord-filled country.
KBN issues its longest tenor green bond to date - US$500m, 10-year tenor, 2.125% coupon, rated Aaa
Kommunalbanken Norway (KBN), the Norwegian municipal bank, has been issuing green bonds for over two years. KBN provides green loans to Norwegian municipalities at a slight discount to rates for its non-green loans. This means it already has a large green loan book to issue green bonds against. The latest green bond from KBN is another $500m issue, that’s the same size as its 2013 green bond, however it’s a much longer tenor of 10 years (compared with 3 in 2013). Moody’s rated the bond Aaa and it has a 2.125% coupon. Bookrunners are BAML, HSBC, JP Morgan and Morgan Stanley.
Investor demand was strong for the issue, with orders exceeding US$700m, showing latent demand for green bonds – great news for all those green bond issuers with deals in the pipeline!
As with the previous green bond from KBN, proceeds will go to green municipal projects in Norway that comply with the green bond framework. CICERO provided a second opinion, which commented that the selection of eligible projects is “relatively transparent, reasonably simple, and standardized in terms of the roles of different actors and their responsibilities”. However, CICERO felt that monitoring and verification procedures are lacking. Now, that was back in 2013, we are not sure if CICERO has provided an updated report for this bond, though concerned investors can access details of the projects funded through the KBN website. Project categories include waste management, water management, energy efficiency, public transport and sustainable housing.
Norway continues to be a leader in green municipal funding - bravo KBN!
Another green municipal bond for water projects from the US; this time from Indiana Finance Authority - $100m, tenor range 5-20yrs, coupon 5%, Aaa
Greening up municipal bond issuance is fast becoming a trend in the US – especially when it comes to labelling state water bonds. The latest offering is a $100m green bond from the Indiana Finance Authority to fund water projects.
Similar to previous US green municipal bonds the $100m green offering is actually a series (in this case over 16 tranches) of green bonds. All the tranches have a semi-annual coupon of 5%, however, tenor ranges across from 5-20 years. Moody’s rated the bond Aaa. Citi was the lead manager.
Proceeds of the bond will be directed to the State Revolving Fund for eligible water projects that fall into the categories of waste water treatment, stormwater management, non-source point and drinking water projects.
As with other recent green water bonds out of the US there is no second opinion provided to investors on the green credentials of the bond making it difficult to evaluate how green the bond is. A key challenge in this space is the lack of green standards or criteria for water. CBI’s water group is working to develop this – until then we would urge new green municipal issuers to at the least report on the use of proceeds of green bonds and to get a second opinion!
Oekom announce sustainability rating for green bonds
Oekom research AG has announced a sustainability rating service for green bonds. According to Oekom, their responsible investor clients have been clamouring for a similar product to the corporate sustainability ratings the research house already produces for thematic bonds. Oekom is a Climate Bond verifier and has a second opinion business that already reviews green bond. Now there is a clear conflict between the second opinions paid for by the bond issuer and an independent sustainability bond rating paid for by investors. Oekom has separated the teams internally and will ensure the ratings are not affected by the second opinion business.
The ratings methodology includes both an evaluation at the company level and the asset level and covers more than climate with social criteria included in the ratings. This gives Oekom’s clients a holistic sustainability rating for thematic bonds similar to the corporate rating for equity investors.
It’s early days for the ratings, with only development banks so far rated, but Oekom already have some clients lined up to subscribe and even expect to have specialised green bond funds using the rating as a determinate of inclusion in the portfolio. Another useful market development.
Launch of Oslo Stock Exchange's Green Bonds Exchange
And finally, back to our Scandinavian country of the week – Norway, where the long awaited green bond list has been launched by the Oslo stock exchange a long awaited development that even made it into the main Norwegian financial newspaper. For more details on this development check out CBI’s coverage of the initial announcement back in December – in short, the criteria for inclusion in the list is a second opinion.
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Brilliant to see initiatives, such as Oekom’s green bond sustainability rating and Oslo stock exchange green bond list, pushing best practice in the green bond market. It makes this year all the more exciting – we are only 5 weeks in after all.
Our blogs are written by a team: Sean Kidney, Tess Olsen-Rong, Beate Sonerud, Katie House, with help from Justine Leigh-Bell.
