The Daily Update - Moves for and against climate change...

The Green Bond market has really taken off over the past couple years and according to Moody’s just last year the market rose 120%; boosted by Chinese issuers, particularly Chinese banks, in their fight to reduce pollution across the country. Issued with an intention to fund environmental projects, corporates, banks and supranationals have been issuing these tax-exempt bonds, which now account for over USD 200bn total issuance; although still a tiny proportion (~1.5%) of total global debt to plough into climate changing projects; if we consider the growing impetus of the Paris Agreement.

Yesterday the National Bank of Abu Dhabi (NBAD), Abu Dhabi’s largest lending bank and the UAE’s second largest, issued the GCC’s first ever ‘Green Bond’. Abu Dhabi holds ~6% of the world's oil reserves, and its hydrocarbon industry generates ~80% of the government's revenues and accounts for over half of the nation's GDP. The government has therefore taken steps since 2015 to diversify the economy away from the hydrocarbon complex into lending, investing and facilitating renewable energy projects ‘focused on environmentally sustainable activities’, NBAD said. According to the the head of sustainable business banking at NBAD, Nathan Weatherstone, there is ‘approximately $640bn of investment required for renewable energy projects across the West-East Corridor’. The new NBAD 5-year USD 587m Green deal is just a drop in the ocean, but a step towards achieving a goal of reducing oil energy reliance.

Rated Aa3, just one notch below that of the Emirate, the 3% 2022 bond was issued at a spread of 109.10bps over Treasuries, we calculated that the expected return, if the bond were to reach fair value would be 2.2%, with a yield just under 3% and ~3 notches of spread cushion. According to sources, the deal was just under 2x oversubscribed, with Middle Eastern banks and funds accounting for ~27% of the issue; while European institutions bagged 50% of the deal. We did not enter into the deal as we have chosen not to hold GCC banks for the time being, and we feel better value lies with, for example China’s state-owned oil company CNOOC’s bonds. The CNOOC 3.8775% 2022 issue currently trades ~55 bps over what we deem is fair value for similar bonds, this implies an expected return and yield of 5.5% for the Aa3 rated issue, which is comfortably over 3 credit notches cheap.

Meanwhile, as the rest of the world including China and Middle East attempt to clean up their act, Trump continues his pledge to undo some of Obama's legacy policies; with his latest attack on the Paris Climate Pledge. According to sources Trump will today look at signing an executive order to unwind a number of rules and directives that address climate change as he strives to re-energise America’s fossil fuel and nuclear capabilities, and revive the manufacturing sector. Looking at the newswires, it appears that few are actually backing this move, and we wonder whether we will see his efforts revoked; especially after his attempts to repeal the health care bill vote were abandoned. But does it matter, after all isn’t climate change a ‘hoax… created by and for the Chinese in order to make U.S manufacturing non-competitive’? (Source: Mr. Trump)