The €1.5bn 0.375% July 2019 note was trading at around mid-swaps minus 19bp on Wednesday, according to one of the leads which were Crédit Agricole, Deutsche Bank and SEB, having been priced the day before at mid-swaps minus 16bp — a level that the leads say was in line with KfW’s interpolated vanilla curve.
“There’s a big debate around whether these deals should price through conventionals,” said a head of SSA syndicate in London. “The compromise seems to be doing trades without a new issue premium, so that the issuer is happy it is printing flat to the curve but the investor doesn’t feel like they’re paying up, and then the deal outperforms the curve in secondary. Issuers shouldn’t take that as a sign that they can start to price these deals through the curve though.”
Books reached €2.65bn with 90 investors participating. The average ticket size is below €30m, said KfW. The size and liquidity of the deal — it tops the previous largest new issue green bonds in the SSA sector, International Finance Corporation’s pair of $1bn efforts — will make it an important pricing comparable, according to one SSA syndicate manager away from the mandate.
“This is of the kind of size and tenor where you can see consistent comparables,” said the syndicate manager. “There is more granularity in euros versus dollars. It is half the size of the smallest KfW benchmark but there is room for more secondary trading in this bond and so it should help to show the true value of a green bond.”
Curve comparison
The minus 16bp pricing level was in line with the issuer’s interpolated curve, according to Stefan Reiner, director in debt capital markets at Deutsche Bank. KfW’s €5bn 0.875% March 2019s were bid at mid-swaps minus 17.5bp before announcing, while the €5bn 1.625% January 2021s were at mid-swaps minus 12.1bp.
“This bond has outperformed the curve but that is not a big surprise,” said Horst Seissinger, head of capital markets at KfW in Frankfurt. “The book is made up largely of buy and hold investors and almost no fast money is involved. Due to the large order book, many investors are now trying to get their hands on the bond.”
Crédit Agricole, Deutsche Bank and SEB priced the bond at mid-swaps minus 16bp on Tuesday afternoon. That is at the tight end of guidance of mid-swaps minus 15bp area that the leads circulated that morning.
Proceeds of Tuesday’s deal will go to the KfW Renewable Energies Programme — Standard. KfW has demonstrated the impact that the programme has had on the environment, certified by the Centre for Solar Energy and Hydrogen Research, Baden-Württemberg. That is an important feature for investors and is an addition that is expected to become more popular.
“I don’t expect every issuer to adopt detailed impact reporting right away,” said Manuel Lewin, head of responsible investment at Zurich Insurance Group in New York, “but we hope that standards around impact reporting will emerge and KfW is looking to show what best practice can look like”.
Impact reporting helps on several levels, he said. Those that are investing in green bonds are doing so because they want to have an impact, and it makes sense to be able to measure that impact in the same way as you can measure return and risk. But it is also useful to have facts to point to when discussing how green an investment is or not: “It’s also important and useful when you’re dealing with criticism of the use of green bonds. If people say that they don’t have an impact you can point to that figure.”
The size of the deal should encourage other issuers to come. KfW’s roadshow for the bond last week, which took in Frankfurt, Paris, Stockholm and Zurich, with calls to the Netherlands, sparked interest from a broad range of market participants.
“We saw a lot of interest during investor meetings,” said Christopher Flensborg, head of sustainable products and product development at SEB in Stockholm. “We had everything from corporate CFOs, pension funds, ethical investors to hedge fund managers coming to the meetings to listen and learn about the product. That just shows what a broad audience the deal attracted.”
Flensborg expects to see some larger green bonds coming out soon and has another six in the pipeline.
“This is a milestone transaction,” he said. “Green bonds have been a very good niche product but this deal takes it to a wider audience.”
The distribution was markedly different to KfW’s standard five year euro benchmarks. Fund managers took 50% of the green bond, compared with just 12% of its last five year euro benchmark, a €5bn 0.875% March 2019 that was priced at mid-swaps minus 9bp in March.
Insurance companies and pension funds also increased their take with the green issue, taking 11% compared with 4% in March.
By geography the distribution was up for investors in the Benelux region at 18% from 9% in March, in Scandinavia, at 17% compared with 11%, in Switzerland at 7% from 4% and in France at 6% from 3%.
“One of KfW’s intentions was to broaden its investor base,” said Reiner. “In order to keep the bond liquid in the secondary market we intended to also have standard investors participating. After one hour book building we had already orders in excess of €1bn, and there was a balanced mix of green and mainstream investors. Later, more green funds came in — these can also be smaller investors and need a little more time to participate."
