From a structural perspective, this week’s most interesting development was a Reuters report announcing that Italian electricity producer Enel plans to end its Green Bond program, replacing it with issuance of bonds linked to sustainable development goals (SDG).

• The report quotes a company spokesperson stating that “the SDG format is going to replace Green bonds” within the markets, and “will be used for Enel’s future bond issuances”.
• Enel has sold EUR3.5 billion of Green debt since 2017. 
• The report claims Enel is marketing a Euro-denominated SDG issue, having sold USD1.5 billion of SDG debt in early September with USD4 billion of demand and 70% being allocated to environmentally-oriented buyers.
• This issue also was noteworthy for being the first to have a coupon step-up feature based on environmental targets. This applies if Enel fails to bring renewable supply to 55% of its capacity by end-2021, versus 48% at present, within its wider pledge to grow its renewable base by 25% with an additional 11.6GW of capacity.
• According to Reuters/IFR, this dollar deal was heavily placed with a few large generalist US funds that were lagging their targets for environmental and social investment.

The move is subject to criticism from market participants in that it has limited controls on the use of proceeds and does not specify the environmental purposes to which the borrowing will be targeted. Further controversy arises from issuance by Brazilian meat producer Marfrig using the SDG format despite widespread claims that its core activity of cattle ranching is environmentally harmful.

In parallel, there have been several positive developments for the Green Bond sector, with two additional sovereign borrowers moving towards issuance and two successful bond sales:

• Sweden has stated that it plans a Green Bond sale in 2020 and on 3 October appointed a bank to advise it on structuring the deal.
• Roberto Gualtieri, Italy’s new Finance Minister, has stated that it “would like to issue” in the segment while making sustainability a wider government priority.
• On 7 October, Pepsico Inc launched a debut USD1 billion 30-year Green bond. Proceeds will be used to invest in projects to increase use of environmentally-friendly product packaging, reducing the carbon footprint of its operations, and improving water usage. The deal priced at 92 basis points over comparable US Treasuries, versus guidance of 110 basis points, two basis points tighter than the firm’s outstanding 30-year debt.
• Adani Green Energy, the renewable solar power subsidiary of India’s Adani Group, gained over USD2 billion in demand for a USD362.5 million Green 20-year 4.625% bond issue to fund three specified projects. According to Economic Times, the deal is India’s first 20-year Green bond sale. According to the company statement, proceeds will repay existing borrowings in both foreign currency and rupees, with the balance serving for capital expenditure, project liabilities and other corporate purposes.

Other debt highlights

• The Republic of Italy opened books on 8 October on a sale of five, 10 and 30-year dollar-denominated debt at margins of 125-130, 165-170 and 250-255 basis points over the respective mid-swap rates. It priced USD7 billion, reportedly more than double its initial target, with demand exceeding USD18 billion. The three tranches were set at margins of 105, 150 and 235 basis points respectively.
• The Republic of Greece arranged a syndicated tap of its 3.875% March 2029 deal. The deal was launched on 8 October with guidance at 1.55% area: demand grew to EUR5.4 billion, permitting the deal to be priced at 1.5% yield and sized at EUR1.5 billion. Final books reached over EUR7.6 billion, from over 250 accounts, dominated by fund managers and banks. UK buyers took 49%, followed by Nordic investors with 10.1%.
• On 9 October, Greece sold EUR488 million of 13-week Treasury bills at -0.02%, its first negative yield sale. The bid-to-cover ratio reached 2.71 times, versus 1.59 times in its prior tender, which had cleared at 0.095% on 7 August.
• Portugal’s first auction after its general election was held on 9 October. It sold a EUR750 million tap of its 2.25% 2034 issue, which cleared at 0.49%, with demand of EUR1.855 billion. On 11 September it had tapped the same issue, placing EUR400 million at 0.676%, with demand of EUR919 million. On the same day, its 10-year bond closed at 0.14%, one basis point below the Spanish equivalent.
• Wind Hellas has raised EUR525 million of five-year debt at 4.25%. It marketed a EUR500 million deal at 4.25-4.5%, gaining over EUR1 billion in demand. Part of the proceeds will repay EUR275 million of outstanding 10% 2021 debt, with the remainder funding investments and new infrastructure.
• Bank of Ireland successfully relaunched the EUR300 million deal it withdrew last month over Brexit-related volatility. The issue was priced at 2.375% and “was more than three times oversubscribed”, according to a statement by Sean Crowe, CEO Markets & Treasury.
• Irish aircraft leasing firm Aercap has sold USD750 million of junior subordinated debt at 5.875%, with a sixty-year maturity.

Our take

Enel’s move towards SDG rather than Green Bond issuance sets an interesting structural precedent towards easier standards for environmental issuance, although the company argues that its overall strategic commitment to environmental issues is both clear-cut and positive.

• On 30 September it announced plans to close its coal-fired generation capacity on the Iberian Peninsula, stating that market conditions and carbon pricing “has determined that mainland coal-fired thermal power plants are not competitive, and therefore their operation in the electricity generation market is not foreseeable in the future.” 
• Despite this, and the overall trend in its business towards renewable energy, Reuters claimed that Enel continues to operate and even invest in some coal-related projects, suggesting that the group made investments of EUR300 million in coal and gas plants in the first six months of 2019.
• Enel’s latest investor presentation shows that in 2018, it had thermal capacity of 46.4GW, versus 43.4GW from renewables: by 2021, it plans to adjust these to 39.5GW and 53.9GW respectively.
• If the SDG route does become more popular, it would have the potential benefit of making environmentally-focused issuance easier for companies, which would not need a specific Green bond framework or monitoring procedures. While Green Bond issuance is expanding, its issuance volume – of around USD250 billion in 2019 – is a small part of the overall market.
• Conversely, use of SDGs would apply looser standards – such as not giving specific use of proceed statements, allowing borrowers to divert some of the funds raised to carbon-heavy or other less-desirable uses.
• This is markedly different from the International Capital Market Association frameworks for Green and Social bonds, which are voluntary principles but have a common core set of components, namely 1. Use of Proceeds 2. Process for Project Evaluation and Selection 3. Management of Proceeds 4. Reporting.

Enel’s planned deal will thus be a test of European market reaction, particularly of the region’s growing number of “ethical” funds.

• The company’s stance serves to flag the current lack of clarity over what exactly constitutes environmentally-friendly debt, and how this should be measured.
• It also comes against the background of European regulators already working to establish a common standard for environmentally-beneficial investments within the EU to provide a single EU standard for disclosure and marketing of such deals, looking to address regulators’ concerns about potentially-uneven disclosure standards and transparency.
• While EU guidelines will not be immediate – needing multi-stage approval – their introduction would establish clearer guidelines over disclosure and monitoring of securities which claim to be environmentally-friendly.

Elsewhere, Italy’s dollar bond sale came against a positive recent background for its debt following the change of government. Its 10-year bond yield has halved from an early-August peak. In turn, this reduces its potential debt service costs. A Financial Times article on 8 October noted that the draft budget is projecting debt service costs of 3.3% of GDP, versus 3.6% estimated in early 2019.

Lastly, Greece’s latest sale looks both a total success and a very powerful indicator of the degree of market improvement this year. This is highlighted by the issue price of 120.686% for the latest tranche, and its yield of 1.5% versus the 3.9% achieved in March this year for the EUR2.5 billion original offering.

Posted 11 October 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence