Market Insight


Turning Green
Wednesday, November 16, 2016


In the Australian corporate bond market, institutional investors have been able to buy green bonds or climate bonds, as they are sometimes referred to, since the World Bank issued green bonds in April 2014. That said, the market has not turned green, issuance has been limited to five issues that have raised a total of $2.3 billion, to date.


Green bonds have been beyond the reach of retail investors, until now, however. The Australian Corporate Bond Company - creator of exchange traded bonds (XTBs) listed on the ASX - has just released 10 new XTBs, including two green XTBs.

What are green bonds?

Green bonds are bonds issued to fund green projects, are certified to be in compliance with international climate bonds standards, and are aimed at socially responsible investors. Apart from the World Bank, the German development bank, KfW, nab, ANZ and Westpac have issued green bonds in the domestic market.

Green bonds generally do not provide issuers with cheaper funds in the Australian market, as the bonds price at the same level as the issuer’s ordinary bonds, but arguably provide the opportunity to reach a broader range of investors.

However in 2015, there was an issue of asset backed securities that achieved more favourable pricing than an identical tranche of securities that were not certified green.

Around the world, green bonds are gaining popularity and the definition of green is expanding.


Green bonds issuance

Last week, a global rating agency reported that record green bond issuance of US$26.1 billion dollars was seen in the third quarter of this year, and annual issuance was poised to exceed US$80 billion. Renewable energy projects accounted for 38% of the issuance, energy efficiency 24%, and clean transportation 17%.

It was further noted that in June, the International Capital Markets Association announced updates to the Green Bond Principals, which included expansion of the range of acceptable uses for green bond proceeds to include projects with social objectives. Social benefit bonds have also been issued in Australia but the relatively few issues have been largely restricted to sophisticated, socially responsible investors.

XTBs created by the Australian Corporate Bond Company were launched in May last year. At the time, 17 separate classes of XTBs were listed on the ASX. Each class of XTBs represented an underlying corporate bond obtained from the wholesale market.

The underlying bonds offered are senior ranking, unsecured bonds issued by Australian listed companies and are more than one year old. Investors benefit from being able to buy senior ranking bonds, which are exceptionally rare among the other debt securities listed on the ASX, from the continuous disclosure requirement imposed on the Australian companies, and from the seasoning of the bonds in the wholesale market.

The initial XTBs covered bonds issued by Aurizon Holdings, BHP Billiton, Crown Resorts, Dexus Property Group, General Property Trust, Incitec Pivot, Lend Lease, Mirvac Group, Novion Property Group, Scentre Group, Stockland Trust, Telstra, Wesfarmers and Woolworths. The XTBs function in the same way as an exchange traded fund.

The latest listing of another 10 XTBs takes the total offering to 49 and the new XTBs are backed by bonds issued by ANZ, Bank of Queensland, Macquarie Bank, nab, and Westpac. The green bonds that have been included are the ANZ, June 2020, bonds and the nab, December 2021, bonds.

The ANZ, June 2020, bonds carry a fixed coupon of 3.25% per annum and based on its listing price, will yield 2.326 per annum until maturity. The nab, December 2021, bonds pay a coupon of 4.00% per annum and come with a prospective yield to maturity of 2.539% per annum.

The ticker codes for these XTBs are YTMANZ and YTMNA1. The ticker codes for all XTBs begin with YTM, typically followed by three letters representing the issuer of the underlying bonds.

Brokers such as Bell Potter and Morgans, include the XTBs on their daily fixed income rate sheets. Each XTB has a face value of $100.00.

Philip Bayley

Philip is the Principal of ADCM Services, publisher of The DCM Review an independent online commentary, analysis and data on Australia & New Zealand's debt capital markets. He is also a contributing editor to Banking Day and a director at Australia Ratings.


 

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