So although Bank of America Merrill Lynch’s head of green bonds is encouraged by the rapid growth of such deals in just a few years, she is also aware that momentum in the market, where issuers raise money for environmentally friendly projects, could fall away as quickly as it began.
“I’m the type of person who always asks what could go wrong from here, and so I think about things like how we keep the momentum going, how we get other participants to play, how we continue to make the market increasingly commercial and welcoming of those who want to participate but increasingly rigorous in its approach,” she told FN at BAML’s London office.
This is despite the fact that green bonds have never been bigger. By late November, data firm Dealogic had tracked more than $ 73 billion in global issuance in 2016, more than double the $ 36.2 billion it recorded in all of 2015, which itself had been a record year. Those figures compare with $ 32.6 billion in 2014, less than $ 10 billion in 2013 and just $ 352 million in 2012.
Highlights in 2016 have included a $ 1.5 billion green tranche in a $ 12 billion bond from technology giant Apple, the company’s first such deal. At the time, Buchta described that deal, on which BAML was a bookrunner, as a “game changer”. Asian issuers have also helped the market soar; China accounts for $ 31.9 billion of green bonds so far in 2016, according to Dealogic, compared with $ 1.3 billion in all of 2015 and nothing before that.
The turning point for the market was 2013, Buchta recalled. That year the International Finance Corporation sold the market’s first $ 1 billion deal; the Export-Import Bank of Korea became the first non-triple A rated issuer; EDF, Bank of America and Swedish property company Vasakronan opened the corporate market; and Buchta and Michael Eckhart, Citigroup’s head of environmental finance, had published a draft version of what would become the Green Bond Principles, a set of guidelines on how green bonds should be structured and sold.
Bank of America helped to open the corporate market with a $ 500 million deal three years ago this month. In November 2016, shortly before the 2013 issue matured, the bank issued its third and largest green bond yet, worth $ 1 billion.
Buchta believes encouraging new issuance remains key. The market is growing quickly, but that $ 73 billion is minuscule given a global new issue market of $ 6.1 trillion so far in 2016
“I think of each sector that opens up as a milestone,” Buchta said. “EDF opened up the utility sector. Unibail-Rodamco opened up the real estate sector. I’m hopeful that Apple has opened the tech sector. And Bank of America opened up the financials sector, which this year that has been the fastest-growing sector.”
She added: “I’m thinking about what new sectors can be opened, like consumer and retail, as well as how to keep getting others to follow in sectors that have been opened but have more room for growth. We don’t seem to have to do too much encouraging to get repeat issuers to come to market. Once an issuer has done a green bond, and it was a good experience, we’ve seen a lot of repeat issues.”
Buchta and her colleagues have given BAML a healthy lead on the advisory rankings, and the bank has risen steadily up Dealogic’s league tables since 2013. Even excluding banks’ roles running issues for their own parent company, BAML has a 2016 market share based on deal value that is almost 2.5 percentage points ahead of Crédit Agricole in second place.
But as issuance volumes have grown, so has competition among the banks running deals. The Green Bond Principles, now run by the International Capital Market Association, have 60 underwriters signed up. Buchta said: “Now, when you’re on a transaction and discussing the green aspect, every bank brings in their green people. Initially there weren’t that many other green bankers out there on these calls. They’re informed, and that’s good.”
Investors, too, have brushed up, asking more pointed questions about green issues during the book-building process, which Buchta said shows “the concept of renewable energy and energy efficiency is becoming more mainstream”.
She added: “Investors have seen that two years of laying the groundwork for their green bond funds and getting out and selling the concept to end users has started to take root. They’re getting a lot more assets under management. We’ve also been looking at how many investors have made public statements that they’re committing $ 1 billion or $ 2 billion to buying green bonds, or that they’ve created a green bond fund. It’s still a small universe, but there’s growth.”
Bankers have often said that the green bond market would truly take off when issuers were able to gain a pricing advantage from selling a green bond rather than a conventional one.
Buchta said that would be “a double-edged sword”, but that there were hints of issuers managing to tighten pricing on the back of big order books.
She added: “As soon as you say there’s a definite advantage for the issuer, it means there’s a disadvantage for the investors, and that makes it harder to grow their green bond funds. We think it’s the case that there’s good order book momentum in the green transactions and that there are good levels of oversubscription, probably more so than if it was a regular transaction, but that’s really difficult to prove. And that can mean deals price tighter. So the issuer definitely doesn’t lose money going the green route and they might save the odd basis point or two, while the investors can still feel that they got a market-based return.”