Despite the set-back of the coronavirus pandemic, companies have once again begun issuing green bonds. The number of green bond issuers now stands at 1,000, although still a tiny universe, at around USD1tn, its growth has been rapid over the past couple years. According to reports, over USD25bn was raised in the first half of September alone, and USD 130bn between January and August.
This year we also witnessed Germany and Sweden join the issuers, with their first ever green bond launches. Germany’s innovative “twin” concept green bond launch of EUR 6.5bn is so far the largest issue this year. Moreover the European Union is looking to issue up to EUR 225bn, ~30% of its Covid-19 aid package, in green bonds; this would be a significant addition to the universe, and will not only boost liquidity, but also aid in the establishment of a green bond yield curve.
Further good news comes from corporate issuers, who are looking to improve their carbon footprints, and move closer to their cleaner energy goals. In the first half of this year a quarter of corporate green bonds were issued by the utility companies. Energy companies can benefit from issuing green bonds, as they can specifically target a particular project, thus improving transparency for investors.
As a general rule, at Stratton Street, we look to invest in hard currency bonds, from “wealthy nations”, and liquidity is important. We therefore generally only invest in bonds with over USD 500m outstanding. We are also value investors, and therefore look for bonds which offer not only high expected returns, but importantly sufficient notch protection. Therefore, it has been quite difficult to find green bonds which fit within our constraints. That being said, we have added a holding in Qatar National Bank (QNB) to a couple of our strategies. Following the launch of its Green, Social and Sustainability Bond Framework in February, the (50%) government-owned national bank came to the market in mid-September with a USD 600m, 5-year bond. Funds raised will be used to "finance and/or refinance assets in verified Eligible Green Projects," the issuer noted. Orders came in thick and fast with the final book standing at USD1.8bn, or 3x oversubscription. According to our Relative Value Model, the Aa3/A/A+ rated bond offers a yield and expected return of 5.3% (using the best rating) and has over 4 notches of credit cushion. We continue to monitor the expanding universe and hope to incorporate further green bonds into our strategies going forward.