Calling EM banks: could a green bond help you?
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Calling EM banks: could a green bond help you?

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Emerging market banks make up a tiny share of green bond issuance but this is likely to change in regions such as the CEE as EM banks could end up being the group for which the product makes most sense

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National Bank of Abu Dhabi, China’s Harbin Bank and Bank of Beijing, Davivienda in Colombia… these diverse banks all issued green bonds in April, according to the Climate Bonds Initiative, an NGO.

But while green bonds are spreading fast, emerging market banks still make up only a tiny share of issuance. That is likely to change — indeed, EM banks could end up being the group for which the product makes most sense.

“Banks remain the natural aggregator of green loans,” said Jean-Marie Masse, chief investment officer of the financial institutions group at the International Finance Corp in Washington. “In eastern Europe, for example, debt capital markets are typically not developed enough that there is debt via a bond, usually it comes from a bank. The bank accumulates green loans and projects are not always very big, so they can be a natural issuer of green bonds.”

Why should a bank bother? At the moment, there is no very clear answer, apart from looking good.

An innovative attempt to give banks a reason to bother is being made by the IFC and Amundi, the French asset manager. They are constructing a $2bn fund to invest only in bank green bonds from emerging markets.

To bridge the gap between cautious Western investors and EM banks with speculative grade ratings, the fund will have two layers of credit enhancement: $125m of junior capital from IFC and $75m of mezzanine from other investors.

The plan addresses the main weakness of green bonds: that the green nature of a bond does not alter its credit quality, so it does not substantially change the quantity or price of funds available to the issuer.

For green bonds issued through the IFC-Amundi fund, credit quality will be improved, as far as the end investor is concerned, meaning the banks should be able to reach investors on much better terms than those normally open to them.

“The point is to create a market that doesn’t exist today,” said Frédéric Samama, deputy global head of institutional clients at Amundi in Paris. “We want to create the demand through the fund, so banks feel comfortable to issue. When they know they can get attractive funding for green projects, that means they will finance more green projects.”

As well as creating demand, the IFC will try to stimulate supply. It will use its extensive connections with EM banks to drum up deals, and help banks with the skills and money needed to structure a green bond programme.

Choosing banks as the medium is apt, the promoters believe, since they can pile up green loans big and small for diverse purposes suited to local conditions.

And there is another advantage: the IFC and Amundi will not need to do any new or complex credit analysis on the green bonds. From a credit point of view, they will be plain vanilla risk of the banks, whose shareholders will stand first in line for any loan losses.

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