Just as the green bond market seems to have hit its stride, so supranational and agency borrowers are starting to look further afield with their socially responsible investment (SRI) themed issuance. One area of themed bonds that could grow rapidly alongside green bonds is gender bonds. The IFC, together with Goldman Sachs, in March launched a $600m debt facility aimed at improving the access of female entrepreneurs in developing countries to finance and, after selling a debut Banking on Women bond last year, has ambitions to bring a syndicated issue soon.
“The SRI investment community is growing fast and the focus is not just environmental, although that is the predominant motivation,” says Evelyn Hartwick, head of socially responsible bond programmes at the IFC in Washington DC. “We also find there is increased investor interest in social benefits that other programmes can bring, such as our Banking on Women programme.”
The IFC sold a first bond issue funding its Banking on Women programme in November — a Japanese retail bond through Daiwa. The issuer has hopes of bringing more bonds soon given the amount of interest the inaugural deal, which was split into an Australian dollar tranche and a Turkish lira tranche and totalled about $165m, has sparked.
The IFC mentioned its inaugural bond in an investor newsletter in February, and generated enquiries from investors across the globe — such as large institutional investors in Australia.
Hartwick has hopes of getting a public deal out by late autumn 2014. The Banking on Women programme, which was launched in 2010, has made 17 investments topping $800m. It lends via financial institutions to small and medium term enterprises owned by women in eastern Europe, east Asia, Africa and Latin America.
“We want to sell a large, liquid transaction that can attract institutional investors,” says Hartwick.
A key part of developing the market for financing projects that improve women’s access to finance is growing the investor base.
“Our first bond was largely subscribed to by retail investors,” says Patience Ball, head of Banking on Women at the IFC in Washington DC. “We would like to expand the scope beyond that to institutional investors. If we can eventually get central banks to be subscribers and go public with those subscriptions, that would be a big boost to financial institutions in those jurisdictions — showing them that their central banks see it as an important segment to serve.”
The IFC is not alone in exploring this type of bond. Other issuers could soon look to follow suit. The African Development Bank, which sold a debut green syndication in October — a $500m three year through JP Morgan, Morgan Stanley and SEB, is looking to expand the scope of its SRI issuance and gender themed issuance is high on its list of priorities.
“A gender bond is very much on our radar screen,” says Hassatou N’Sele, manager of capital markets and financial operations at the AfDB in Tunis. “We believe that gender will be at the heart of Africa’s transformation and will be working on that theme.
“We are also looking to broaden the scope of projects’ eligible to come under our green bond strategy. We will look at other types of SRI issuance, we have already been quite active in Japan with ethical bonds on education for example. Green, however, will continue to be one of our main focus areas.”
Broadening scope
One problem smaller SSA issuers have encountered is not having enough projects to fund to justify a single themed issuance. But one has lumped different projects together to find a way around that difficulty.
Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden (FMO) combined green financing with social projects in a debut Sustainability Bond syndication last year.
Crédit Agricole, JP Morgan and Rabobank priced a €500m 1.25% November 2018 bond for the issuer in November. The proceeds back green but also inclusive finance projects, including microfinance institutions and micro, small and medium sized enterprises.
The potential diversity of bonds backing environmental, social or governance themed projects is effectively as wide as issuers want it to be.
“There’s no reason why you can’t target a whole range of different themes as long as they have a broad appeal,” says Jigme Shingsar, managing director, debt capital markets at RBC Capital Markets in New York. “Issuers are only really limited by their imaginations. Investors still ultimately have to weigh up the benefit of the SRI aspect within the parameters of pricing and credit quality. The basic principles should apply across asset classes.”
And SRI investors welcome this. The broader the range of products available for investors to pick, the more they can tailor their investment strategy to making just those investments which work for their own strategy.
“A diverse range of green investment options is a very positive development,” says Stephen Liberatore, fixed income portfolio manager at TIAA-CREF in New York. “A wider range of investment opportunities provides investors with the ability to target those areas in which they are most interested.”
Many issuers already have the flexibility to structure these bonds. Several have issued Uridashi bonds, sold to Japanese retail investors, covering a wide range of SRI criteria.
The AfDB, for example, sold a pair of education bonds to Japanese retail investors in Brazilian reais in 2013, while Finland’s Municipality Finance raised money with a South African rand denominated Uridashi to finance projects reducing greenhouse gas emissions in Finland.
Diversification key
But what is important for investors, and for issuers, is to develop economies of scale if the market for themed bonds is to grow.
“The key issue is getting non-SRI investors into SRI investments,” says Emmanuel Smiecench, head of SSA syndicate at Société Générale in London. “Supranationals and agencies have done a lot of marketing and they are succeeding at this.”
Without the ability to attract a wider range of investors with large, liquid bonds, those issuers that are minded to can structure bonds backing projects, but these risk being limited to investors that are already SRI investors.
“It’s all very well selling bonds just to SRI investors but it’s a bit like marketing muesli to granola eaters — you’re selling to the converted,” says Shingsar at RBC Capital Markets. “Besides, while the sector is growing — it is still a narrow investor base — these bond issues can have a bigger impact if you raise awareness and attract new investors to support these themes.”
What could be crucial in getting non-dedicated investors is to offer larger bonds, potentially with a degree of standardisation.
“There is always room for different types of SRI deals,” says Liberatore. “As a large fixed income and SRI investor, we are able to find opportunities directly and do the internal analysis that’s required on these investments. But the real goal for the SRI asset class is scalability: it will improve liquidity and transparency in the market, draw new investors to the category and provide economies of scale for the issuer.”
How diverse the range of products on offer becomes will also depend on how much time funding teams can dedicate to developing products while also maintaining their standard issuance programmes.
Borrowers are unlikely to want to spread themselves too thinly. Just setting up green documentation can take a year, and themed bonds don’t at present represent a large portion of issuers’ funding programmes.
“From the issuer perspective, this product can be structured in a variety of ways,” says Adrien de Naurois, co-head of SSA syndicate at Deutsche Bank in London. “However the more specific the theme the smaller the issue size will likely be given that the proceeds need to be ring-fenced for the specific project loans.”
The themed bond landscape could grow into a two tiered system: standardised benchmarks for those themes with enough issuer and investor support behind them to produce large liquid deals and a wide range of small, bespoke deals tailored to issuers and investors that are willing to put the work in.
“Going forward some kind of standardisation will likely ensue to facilitate larger sizes and thereby improve liquidity,” says de Naurois. “This will also help absorb some of the fixed administrative and legal costs that these bespoke transactions can imply.”
The IFC, for example, hopes that Women in Business bonds will develop into an asset class, as green bonds have done. A key driver for that is to have more issuers launching similar instruments and a degree of standardisation. For now the AfDB seems to be readying itself to join them. Whether other institutions can justify their own gender bonds, will show whether this sort of issuance can grow the SRI market beyond the green bond sphere.
