SNP, Tier 2 lead H1 green and social bank bloom

Green, social and sustainability (GSS) bond issuance has trebled its share of key bank products in the first half of 2021, as banks increasingly seek to satisfy investors by reinforcing their ESG credentials and to leverage any pricing benefits available through labelled products.

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Much of the pick-up in GSS bank issuance has come in the form of senior non-preferred (SNP) and Tier 2.

“ESG labels are booming across the liability structure — with the exception of Tier 1,” said Vincent Hoarau, head of FIG syndicate at joint bookrunner Crédit Agricole CIB (CACIB). “More and more sophisticated investors are tightening their green bond criteria to combat greenwashing and force issuers to really drive down carbon intensity.

“Meanwhile, it appears that the vast majority of issuers now want to see the product as a tool to green their balance sheet over time and not only a one-off appearance to tick a box.”

According to Hoarau, euro GSS issuance has risen from 8% of overall SNP and Tier 2 issuance in full-year 2020 to some 25% in the first half of 2021.

“The trio of debut green Tier 2s CACIB lead managed for BayernLB, ING and RBI within the space of a few weeks is the best possible illustration of the current trend,” he said.

BayernLB on 16 June issued the tightest ever German green Tier 2, a €500m 10.25 year non-call 5.25 priced at 135bp over mid-swaps. ING Groep priced its first green Tier 2, a €500m 11 year non-call six, on 2 June, tightening pricing some 25bp on the back of around €3bn of demand to land at 115bp over mid-swaps, around 5bp inside fair value.

And RBI sold its inaugural green Tier 2, a €500m 12 year non-call seven, on 9 June, achieving pricing some 10bp inside fair value.

“To me, issuing Tier 2 in green shows more of a commitment to sustainability because it’s longer dated — in this case, it shows a commitment of at least seven years,” said Katarzyna Kapeller, head of asset liability management at RBI. “And as an issuer, I feel that the pricing benefit is higher in a higher beta product.”

(See RBI and BayernLB Q&As for more.)

The SNP space has seen a similar number of firsts as Tier 2, with La Banque Postale (LBP), for example, issuing its first social bond as a €750m 10 year SNP on 16 June, expanding upon its prior green bonds to embrace social housing and access to essential health services as use of proceeds.

And when Belfius Bank sold a €500m no-grow six year SNP green debut on 1 June, it achieved a greenium of around 5bp, pricing its trade at 60bp on the back of a peak €1.2bn of orders.

“We saw a very important participation of ESG/green investors,” said Ellen Van Steen, head of long term funding at Belfius. “The final pricing level of our inaugural green bond was lower than for a conventional Belfius non-preferred senior transaction, which we believe is a result of the green character of the


However, Hoarau at CACIB — joint bookrunner and framework structuring advisor for LBP and Belfius — noted that the demand/supply imbalance in the broader credit market and favourable conditions for issuers have at times reduced the visibility of any greenium.

“But with the summer lull ahead and supply likely to dry up,” he added, “we expect secondary ESG curves to outperform the conventional pile.”

The latest bank to enter the green, social and sustainability (GSS) bond market was Banco BPM, which on 8 July sold a €500m five year senior preferred debut social bond. The transaction is the first off a new GSS bonds framework, for which Crédit Agricole CIB (CACIB) was green and social structuring advisor, with the focus of the inaugural trade small and medium-sized enterprises affected by the Covid-19 pandemic.

“This first issue proves how sustainability is already integrated within the bank’s strategy,” said Giuseppe Castagna, CEO of Banco BPM. “The response from the institutional market demonstrates once again the bank’s ability to combine its proximity to its local areas and to the entrepreneurial community with the appreciation of investors, including international ones.”

Following initial price thoughts of mid-swaps plus 140bp-145bp for the five year bullet senior preferred social bond, the €500m deal was priced at 130bp on the back of €660m of orders.

“Despite an overall softer backdrop, with equities falling on the back of fears of a renewed wave of Covid, Banco BPM was able to achieve a historic low level for a senior preferred trade,” said Hoarau at CACIB. “Demand was also of an extremely high quality, and they enjoyed a strong participation of dedicated ESG accounts.”

Banco BPM’s framework allows for a range of instruments including senior non-preferred and covered bond issuance as well as senior preferred.

EBA discouragement to limit SLBs

While banks increasingly embrace use of proceeds bonds in green, social or sustainability format, the extent to which they will take up sustainability-linked bonds (SLBs) remains uncertain, particularly after the European Banking Authority (EBA) affirmed its discomfort in a report on 24 June.

Following a surge in SLB issuance from non-financial corporates, Berlin Hyp on 13 April became the first bank to sell such an instrument, issuing a €500m 10 year senior preferred bond with a coupon step-up triggered at maturity should it not hit a carbon reduction target. China Construction Bank (CCB) followed this up in the same week, including in a larger transaction $1.15bn (€968m, CNY7.45bn) of SLBs that were the first such instrument for a G-SIB and first from a commercial bank in US dollars. CACIB was sole structuring advisor for Berlin Hyp’s SLBs and joint bookrunner for it and CCB.

Unlike use of proceeds green bonds, SLBs are linked to a KPI and typically trigger a coupon step-up in the event that the issuer fails to meet predetermined sustainability performance targets (SPTs).

In its report, EBA said “step-up and or fees” based on missing ESG targets or other performance indicators should not be allowed or encouraged on MREL/TLAC eligible instruments, as they could be regarded as incentives to redeem. EBA said it will continue to assess and monitor such features going forward.

The regulator’s stance was not an issue for Berlin Hyp, for whom the SLB was not intended to be MREL-eligible, but it is expected to restrain bank issuance.

“While other actors could follow the example of Berlin Hyp on the SLB senior preferred segment, we do not expect European banks to issue SLB TLAC/MREL debt instruments following the EBA’s guidance,” said bank and green bond-ESG fixed income analysts at CACIB in Credit Focus — The SLB AT1, Tier 2 and senior bail-in instruments should not be allowed for banks (7pp), 12/07/2021.

“As a result, and also taking into account all constraints linked to KPIs for banks, the SLB banking segment is likely to remain limited — at least in the short term.”