Green Bonds Market Outlook 2014

Tuesday 05 August 2014

A record $16.6bn of green bonds have been issued to-date (2nd June) 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 like 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.

• 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 green 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 type 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.
 

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