A record $16.6bn of green bonds have been issued to-date in 2014, driven by a surge in corporate self-labelled issuance and sustained volumes from large international and supranational banks. At its current pace, total 2014 volume could surpass $40bn, triple the $14bn issued in 2013. Innovative asset-backed securities and new entrants to the corporate space provide a solid foundation for an aggressive near-term growth trajectory.
EXECUTIVE SUMMARY
• Thus far, through 2 June 2014, a record $16.6bn in green bonds have been issued in 2014, driven by a surge in corporate self-labelled bonds and high volumes from large international and supranational institutions likes the World Bank.
• The market is growing fast: at its current pace, total volume in 2014 will surpass $40bn by the end of the year, triple 2013’s volume. However, it still constitutes only a small fraction of the broader bond market. Global green bond issuance in 2013 was about 1% of the value of the US corporate bond issuance, which was over $1.4 trillion.
• The entrance of self-labelled green corporate bonds – bonds issued by corporations with proceeds ring-fenced for green investments – has opened up a new source of capital for the market as has the emergence of innovative asset-backed securities like the distributed solar-backed bonds pioneered by SolarCity in late 2013.
Corporate self-labelled
• Self-labelled green corporates function in much the same way as international and supranational bonds: their proceeds are used to fund green activities, but their repayments are from general corporate funds. Issuers have not been able to realise pricing advantages through green labelling as investors are unwilling to take lower than expected coupons simply for the ability to ‘go green’.
• Bank of America Merrill Lynch has been both an issuer and an underwriter of these types of bonds. In terms of issuance, it kicked-off the corporate self-labelled space in early November 2013 with a $500m green bond, the proceeds of which are to be used to finance renewables and energy efficiency via loans and credit lines to industry participants. Since then, about $9.7bn in corporate self-labelled green bonds have been issued by nine companies in Europe and the United States.
• In terms of underwriting, Bank of America Merrill Lynch is the top self-labelled underwriter with just over $1bn in underwriting since mid-2013, having participated in their own $500m offering as well as in deals with GDF Suez, Unibail-Rodamco and Iberdrola. Swedish bank SEB comes second.
Asset-backed securities
• The green ABS market kicked off in 2013 with Hannon Armstrong Sustainable Infrastructure’s issuance of a $100m ABS backed by the cashflows of over 100 wind, solar and energy efficiency projects at 20 properties across the US. Total issued since that date – across five different deals from four issuers – is $2.08bn.
• SolarCity’s inaugural solar-backed ABS in November 2013 marked the start of what will likely be a significant market for solar securitiation in the US. Although small at $54.4m, it was a first step in testing the waters of both the demand for these securities and the process of issuing them. The company issued a second ABS ($70.2m) in March 2014. This report contains a special section on SolarCity’s pioneering 2013 deal; key characteristics of that ABS include:
– Over-collateralisation, a risk enhancement for investors, was 61%, a huge figure versus other niche ABS types (where 10% is typically high)
– Residential systems made up 90% of the ABS by value and 71% by number of systems
– The delinquency rate of payments 120 days or more past due is 0.31%
– FICO scores were in the range of 680-886 with an average of 762
– The securities are priced at around a 300 basis point (3.0%) premium auto loan ABSs of comparable maturity, a premium which will likely compress with issuance repetition.
– Yingli manufactured 44% of the modules underlying the deal while Fronius made 48% of the inverters
• Toyota’s bond takes the form of a standard auto-loan backed ABS whose cashflows are tied to repayments of outstanding loans for the company’s cars. What actually makes it greens is that the company has ring-fenced the proceeds for a fund that will provide leases and loans for the company’s green vehicles such as the Prius.
• The Western Riverside Council of Governments – a municipal agency in California – worked with Deutsche Bank to issue a first-of-a-kind securitised property assessed clean energy (PACE) bond. The PACE programme allows governments to provide property owners upfront capital for energy efficiency improvements, which are in-turn repaid through additional charges on homeowner property taxes.
Project bonds
• Over $3.1bn of clean energy project bonds were issued in 2013, a 53% increase from 2012. Nearly a third of the total volume was attributable to a single project, a $1bn issue backed by the 580MW Solar Star PV project, owned by US-based Berkshire Hathaway Energy.
• In the last 12 months, two large wind portfolio bonds have been issued: one from US-based Exelon backed by 13 wind farms and one from Swedish developer Arise with 10 wind farms. As the pipelines of European and US-based large-scale onshore wind and PV projects slow down, these types of issues backed by multiple smaller projects could prove to be a growing source of renewables project bond volume.
Supranational/international bonds
• Supranational and international banks issued a record $7.1bn of bonds in 2013, a 70% increase from the previous best in 2010. With $6.1bn issued year-to-date they are on record to beat that volume within the next few months.
• Average supranational issuance size jumped 370% in 2013 to $375m from $86m in 2012 as banks began to bring benchmark-size bonds to the market: the World Bank has issued two $1bn bonds since Q1 2013. Structures have evolved as well: in March 2014, the European Investment Bank issued its first green ‘Samurai’ bond (yen-denominated bonds issued in Tokyo by foreign companies) and the World Bank launched its first green ‘Kangaroo’ bond (Australian dollar-denominated bonds issued in Australia by foreign companies).
National/municipal bonds
• Government entities issued $910m in green bonds in 2013 as a number of new programmes and issuers came to market, accounting for $677m of total volume. Previously existing US municipal bond schemes made up the remainder. $1.3bn has been issued so far in 2014, mostly by international governmental agencies.
• Two regional German banks plus the City of Gothenburg Sweden entered the market in 2013. Ile de France – the governing authority of Paris and its environs – issued its second bond in April 2014 (the first had come in March 2012): an $829m issue with proceeds earmarked for a broad array of projects including typical renewable energy and energy efficiency developments plus innovative initiatives like ecological corridor development. Gothenburg announced an additional $270m worth of bonds on 26 May 2014.