Investors keen to share EU social bonds opportunity
On 20th October, European Union (EU) sold EUR17bn worth of social bonds, the largest such labeled transaction so far. The deal comprised of a EUR10bn 10-year, and a EUR7bn 20-year offering aligned with the ICMA Social Bond Principles (SBP). The pair of bonds were issued under the Support to mitigate Unemployment Risks in an Emergency (SURE) programme first proposed by the EU in April 2020.
Funding under the SURE programme is available to EU Member States requiring substantial financial assistance to combat the domestic impacts of COVID19. The EU is classified as a supranational issuer rated AAA by both Moody’s and Fitch. The EU has 39 other separate bonds with a combined total of around EUR50bn outstanding.
A SURE Analysis
The SURE bonds received a hearty welcome from the market with order books reaching EUR233bn, which covered the final total deal size by more that 13 times leaving huge unmet demand on the table.
For context, we have identified 18 EUR denominated bonds from a variety off sources, issued in 2020 with a social, sustainability, or pandemic theme. Each has an initial deal size of at least EUR1bn and the next largest book cover was the EIB 2028 sustainability bond issued in April 2020 which was 7.3 times oversubscribed.
Table: EUR denominated bonds issued in 2020 with a social, sustainability, or pandemic theme.
Short name | Theme | Original size (EUR Bn) | Book cover | Pricing Date |
World Bank 2027 | Sustainability | 3 | 1.4 | 09/01/2020 |
Korean HFC 2025 | Social | 1 | 1.4 | 29/01/2020 |
LBBW 2027 | Social | 1 | 1.5 | 11/02/2020 |
World Bank 2027 | Sustainability | 2.5 | 1.1 | 13/02/2020 |
Madrid 2030 | Sustainability | 1.25 | 5.6 | 18/02/2020 |
NIB 2023 | Pandemic | 1 | 3.1 | 30/03/2020 |
COE Dev. Bank 2027 | Pandemic | 1 | 4.5 | 02/04/2020 |
NWB Bank 2023 | Social | 2 | 1.4 | 02/04/2020 |
EIB 2028 | Sustainability | 1 | 7.3 | 02/04/2020 |
Flemish Community 2030 | Sustainability | 1.25 | 1.9 | 03/04/2020 |
World Bank 2028 | Sustainability | 3 | 1.2 | 16/04/2020 |
Caisse Francaise de Fin. 2025 | Social | 1 | 4.5 | 28/04/2020 |
UNEDIC 2026 | Social | 4 | 1.9 | 15/05/2020 |
BBVA 2025 | Pandemic | 1 | 4.6 | 27/05/2020 |
Region of Wallonne 2040 | Sustainability | 1 | 1.7 | 28/05/2020 |
UNEDIC ASSEO 2029 | Social | 4 | 2.2 | 10/06/2020 |
European Union 2030 | Social | 10 | 14.5 | 10/20/2020 |
European Union 2040 | Social | 7 | 12.6 | 10/20/2020 |
Diversification
Primarily, the EU SURE bonds represent large, liquid instruments, with the highest credit rating, and the 2040 maturity has a tenor long enough to offer a positive yield. This is a diversification play for every single investor in the world, hence the exaggerated levels of interest. Bonds provide a haven investment in turbulent times such as we have experienced this year.
Further, investors can be particularly cautious in the run up to major political events, of which the upcoming US election is an example. The ECB has continued to support the bond markets in 2020, maintaining low interest rates, extending its Asset Purchase Programme (APP) and introducing the Pandemic Emergency Purchase programme (PEPP) earlier this year.
Secondary to this is the social label. The social label enables investors to commit to a responsible investment strategy with a clear and transparent use of proceeds which will be tracked and reported on throughout the life of the bond (as per the ICMA SBP).
The last word
The EU is on track to becoming the biggest seller of sustainable bonds and is expected to begin selling more than EUR200bn of green bonds in early 2021. This demonstrates clear leadership by example, in contributing to the growth of a more liquid market for bonds supporting themes which are crucial to the survival of our species.
The commitment of the EU will likely encourage more investors to explicitly label funds as green, sustainable, or social knowing that there is a supply of large, liquid assets to buy. Once this happens, more issuers of all types have an incentive to bring labeled bonds to the market with the knowledge that they have that extra pricing lever. This works because there would then be a larger contingent of investors who would have to look at labeled bonds because their investment policy guidelines say so.
More Sustainable Sovereigns
Sovereign bonds are the obvious instrument to introduce scale, liquidity, and opportunity into a market. So far, around 20 sovereign issuers have come to the market with green, sustainable, or social bonds. We hope that some of those yet to take the plunge will be encouraged by the reception of the EU bonds, and perhaps consider accelerating their issuance programmes to satisfy the unmet demand from investors.
‘Till next time,
Climate Bonds.
