ESG
In an investor call on 27 August, the German Finance ministry announced that it plans to issue up to EUR6 billion from the pending sale of Germany's debut Green bond, which will have a 10-year maturity. It plans to sell up to EUR12 billion of Green debt in 2020 to fund a pool of EUR12.7 billion of identified projects.

In an earlier statement Joerg Kukies, Deputy Finance Minister, stated that a second offering would follow in the fourth quarter, with Germany looking "to become the euro-area's benchmark issuer across various maturities, to build a green yield curve for green bonds". Media reports suggest that two, five and 30-year Green sales will thus follow in due course. Kukies also suggested that the planned 10-year sale would be priced in line with outstanding conventional bonds, without specifying which issue would be "twinned" with a green equivalent.

Coca Cola Femsa enjoyed clear success with its debut Green Bond on 26 August. It gained orders of USD5.2 billion for a proposed USD500 million sale, increasing the issue to USD705 million in response to the strong demand. The issue was priced at 1.887%, 120 basis points over US treasuries. According to sources cited by Latin Finance, the deal paid a negative new issue premium and achieved the lowest coupon on record for a Latin American borrower for the maturity. The company specified that proceeds would be used to help achieve its Emissions Reduction 2030 plan, including improvements to water usage and waste management including the recycling of PET bottles.

ANZ is reported to have sold the first domestic Tier 2 bond in Australia linked to the UN's sustainable development goals. The AUD1.25 billion issue was almost twice subscribed and priced at BBSW plus 185 basis points versus 200 basis point initial guidance. The proceeds will be used for project finance and corporate lending for green, social and sustainability purposes along with meeting the bank's own capital requirements.

Danish municipality agency Kommunekredit has issued its second Green Bond, a EUR750 million ten-year deal priced at 0.835%, six basis points under mid-swaps versus an initially indicated margin of minus three basis points. Demand exceeded EUR1.5 billion with "a strong proportion" of the book from sustainability-oriented investors., with nearly 60 accounts involved. Bank investors took 44%, official institutions 23%, with 23% also going to insurers and pension funds. German, Nordic and French buyers represented 28, 25 and 20 percent of allocations respectively. Proceeds will be applied to eligible projects covering water management, district heating, energy efficiency and clean transportation, with the issuer funding over 200 Green projects across Denmark.

Volkswagen also has announced plans for Green issuance, with a deal of over EUR1 billion slated for September, its first under the firm's framework announced last March. CFO Frank Witter argued that "there is a growing proportion of investors searching for Green Bonds" and that "we have been taking very seriously" the area of ESG issuance. VW plans to use the proceeds for its electric vehicle program, with plans to invest EUR33 billion in the area by 2024.

According to Moody's data, ESG issuance reached a quarterly record of USD99 billion in Q2 2020, 65% above issuance levels in the preceding quarter.

Emerging markets

Dubai is conducting marketing for dollar issuance, planning 10-year sukuk and 30-year conventional debt. The issue, its first in six years, is reported to be seeking USD2 billion or more, to reflect additional fiscal spending including USD2 billion of support for Emirates airline.

Argentina's Finance Minister reported "massive" acceptance of the country's proposed debt exchange. Local media reported that the exchange attracted 93.55% acceptance permitting the application of collective action clauses on 99% of the country's outstanding international debt. Market sources suggested, according to Cronista newspaper, that only the USD600 million of Par 2038 bonds in US dollars and Euros failed to reach the required two-thirds qualifying majority, with a Swiss Franc tranche also in doubt.

Other debt

Tencent Music Entertainment Group gained an impressive USD12 billion in demand for a USD800 million two-tranche sale spanning five and ten-year maturities.

Finland attracted EUR27 billion of demand for a EUR3 billion sale of 10-year debt. The order book spanned 150 investors, with the deal being priced at -0.217. The Finnish Treasury's statement noted that the deal was Finland's first issue with a negative yield for the maturity, but that this "did not seem to affect the investor base, which demonstrated a very typical pattern".

Finnair's refinancing of outstanding perpetual debt proved hard work. On 26 August, the airline raised EUR200 million of perpetual non-call three-year debt, priced at 10.25% until first call, with orders reportedly having reached EUR250 million. The offering is the first airline deal in the Euro sector since the pandemic, and paid more than troubled cruise operator Carnival, which had placed a 5.5-year Euro-denominated in July at 10.125%.

Total continued the rush of European hybrid issuance with a EUR1 billion issue on 27 August, first callable after 10 years. Five European deals were completed over the full week, but this did not damage the reception for Total, which priced 37.5 basis points inside initial guidance. According to International Financing Review, demand exceeded EUR2.8 billion.

Australia's latest domestic syndication raised an impressive AUD21 billion, with AUD66 billion of bids at the clearing level of 1.055% for the new November 2031 bond.

Outlook and implications

Germany's Green Bond debut represents an important development for ESG issuance. While Germany's Bund securities are not the sole pricing reference for the Euro-denominated sector, they are widely viewed as the most-used proxy for a "safe rate", widely serving as the nearest equivalent to the US Treasury curve in dollars.

Germany's decision to issue Green Bonds is a political statement of adherence to climate change goals, although its issues will enjoy natural support from dedicated ESG investors as well as conventional buyers, so widening its investor base.

Its reported initial deal size appears quite modest, matching that sold by the Netherlands in 2019 (which subsequently was tapped with a further EUR2.8 billion in June 2020). In January 2017, France sold EUR7 billion of its Green OAT 1.75% due June 2039, the first sovereign benchmark bond. The size of Germany's debut faces the natural constraint of the availability of suitable projects within eligible categories, and the goal of developing a yield curve quickly within its program.

The question of relative liquidity does appear a potential issue. An analysis of Germany's outstanding securities with maturities in 2029-31 shows seven outstanding issues, the smallest of which is the EUR11.75 billion 6.25% January 2020 bund (first issued in 2000). The two benchmarks sold in 2019 with 2029 maturities each reached the size of EUR26.5 billion, and the current on-the run bund, the 0% August 2030 issue, has a size of EUR14 billion.

Accordingly, despite being a large reference point, the new Green Bond could be a quarter the size of some past 10-year benchmarks sold in 2019, and less than half that of the current reference 10-year bond.

This implies a two-way pull for potential pricing relative to Germany's conventional curve: a smaller sized deal should trade at a higher yield to reflect its lower liquidity, but in this case will benefit from the incremental demand of ESG dedicated buyers - and others - keen to hold the first German reference ESG deal within their portfolios. The outcome of these opposing factors will be an interesting indicator not only regarding Germany's Green Bond program but for other sovereign issuers in respect of the liquidity/ESG tradeoff.

Given the rarity of the instrument, and citing our German Economist Timo Klein: In as much as investors identify with such spending purposes, which is highly likely, their willingness to help finance that might overcompensate pricing concerns stemming from lower liquidity. Timo advises that investors may well be willing to pay a premium to hold the issue within their portfolios, with subjective, non-technical factors driving their actions. Accordingly, the German government might not suffer higher issuance costs versus its standard bonds and could even benefit from the scarcity factor relating to its first Green Bond.