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People and Markets

Austria’s plan to bring sovereign green debt to money markets

The head of Austria’s debt management office, Markus Stix, previews the first sale of sovereign green T-Bills and discusses the country’s growing ESG funding task

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Such has been the pace of innovation in the ESG securities markets over recent years that it is hard to imagine a form of debt that has not yet been created or repackaged to help capital flow to funding the fight against climate change and other worthy causes.

But Austria has found one — green sovereign money market instruments. On October 18, the country will become the first to issue green T-Bills when it auctions €1bn of four month paper.

Austria issued its first green bond — €4bn of debt due 2049 — in May. The sale of green T-Bills will complete the country's green funding requirement for the year but it is only the beginning of what will be a growing funding task.

The country has strong green credentials already. It takes more than 30% of its energy from renewable sources, according to Eurostat, with the EU average clocking in at under 20%. Of that, Austria generates 78.2% of its electricity from renewable sources — the highest figure in the EU, for which the average is 37.5%.

The country also ranks seventh out of 182 countries in the University of Notre Dame's rankings of how susceptible and prepared countries are for the negative effects of climate change.

Part of the reason for this is because it takes funding green expenditures seriously. The country has, according to the its debt management office, the Austrian Treasury (OeBFA), the highest share of green expenditure among the world's sovereign green bond issuers — 3.4% of the federal budget in 2021, worth around 1.3% of GDP.

OeBFA is no stranger to the idea of doing things a little differently among sovereign issuers. A little over five years ago Austria caught the market's attention by issuing a 100 year bond. The deal, priced in September 2017, raised €3.5bn at a re-offer yield of 2.112%.

That looks like a brisk piece of business now with that yield roughly equivalent to where four year Austrian government bonds were trading as this article went to press.

Austria's next piece of innovative issuance will be at the other extreme of the yield curve when it sells its first slug of green T-Bills. Sovereign issuers will no doubt be watching keenly to see what opportunities this new market could present.

Markus Stix, OeBFA's managing director, spoke to GlobalCapital about the new product, its origins and how it expects to grow its green money market funding in the years to come.

GlobalCapital: How big is Austria's green spending and what part has the Treasury in funding that?

Markus Stix, OeBFA: The funding volume under our green framework for this year is more than €5bn — around €5.1bn — and this reflects 3.4% of the federal state’s expenditures. With this percentage, Austria's reflects the highest share of green eligible expenditures within a sovereign state budget, and 1.3% expenditures versus GDP. This is an increasing trend, for next year it will be around €5.4bn out from the federal budget.

And I mentioned the federal budget a couple of times — why? Because if you would include the country’s sub-sovereigns and their affiliates in the framework, you have additionally €2bn-€3bn of eligible expenditures per annum. In two or three years we plan to have the sub-sovereigns and affiliates included in the federal total as well when we update our framework.

This year, we have a range of €60bn-€65bn of gross borrowing to fund. Out of this, around €5bn will be financed with green instruments — so about 8% but with an increasing share for the next couple of years.

And of the €60bn-€65bn of borrowing, around 12% out of this is on-lending to sub-sovereigns and affiliates. This will be the same strategy for their green projects later on when we update the green financing framework.

The overall funding strategy is on the one hand, to issue conventional bonds, and on the other hand, green instruments of medium to long term maturities on the bond and loan side, and T-Bills and commercial papers on the short term side.

So investors could expect the overall volume of Austrian sovereign green issuance to increase over the coming years.

Yes, indeed.

Austria is not a one-off issuer in the green market but will be a regular green issuer. The clear goal is to build up a curve, issuing each year €5bn and upwards in green instruments. Hopefully, we will end up on the one hand with a liquid green T-Bill market as well as for our green bonds.

The intended share will be 80% of green issuance in medium to long-term bonds and 20% in the short-term programme.

We did €4bn in May, with our inaugural green bond transaction due 2049 and €1bn will now follow on October 18 with the first green T-Bill via auction.

Do you want to issue the full €1bn in the inaugural auction or will there be other short-dated products?

For this year, the auction on October 18 will be the first and the last issuance of green short-term paper from Austria. We think €1bn is a normal, regular size per line also for the future.

We will finance this by one transaction starting from October with a maturity date in February — a four month period. That's not a typical period for this market. But after redeeming in February next year, we will issue on a rolling three month period from February to May, May to August, August to November, November to February and onwards.

We picked February because we have conventional bills maturing in January, April, July and October. So, avoiding to have in one month conventional bills and a green T-Bill maturing, we split up the redemption profile. That's the reason why we start with this four month period and then roll it on a three month tenor.

Why did you choose to do that rather than say, just wait until November to do the auction?

To be honest, November, in this year — and if you look at the market volatility — I think it’s not an ideal time to come with a new product that late in the year.

In this situation, a lot of investors will have closed their balance sheets maybe earlier than usual due to the high market volatility That's the reason why we decided for October.

And will it just be green T-Bills? Or will there be green commercial paper as well?

This year, only green T-Bills. Next year, we will roll the €1bn from this year, but there will be more than €1bn to issue and there, hopefully, we will have green CP as well.

Is there any difference in what the €4bn 2049 green bond funds and what the T-Bills will fund? You spoke of the bonds funding 80% of the eligible expenditure and the short dated issues funding the rest. Are those specific projects or does the money just roll every year funding the same projects?

There is no special allocation to certain expenditures. It’s a pro-rata allocation process. And our intention is to roll the short term volume up to the same maturity as the outstanding bond — so up until 2049.

So, from an expenditure allocation point of view, it makes no difference for the investor whether they invest in the bonds or in the T-Bills.

When you sounded investors about green T-Bills, what was the response? And what do they want in terms of reporting? Often that's done annually but you obviously can't really do that on a three-month timetable.

The response was really positive because a lot of investors have the need to invest in short term paper due to their investment horizon. You have a lot of money market funds, you have the central banks — they are getting more and more ESG-centric in their investment strategy, and their maturity profile is more on the short-term horizon. They are really happy that we will bring the first T-Bills in green format.

We know that on the corporate side, T-Bills and commercial paper are a regular part of the market among the banking community. So there has been a very warm welcome from the investor community.

Regarding the reporting, it is clear that we will not report on a quarterly basis. We will establish our allocation report on an annual basis and intend to do the impact report on at least a biennial basis. And we will report in the annual allocation report all the green short-term transactions.

Will the inaugural green T-Bill auction be conducted through your primary dealers in the traditional format like all your other auctions?

Yes. It's not going to be a syndicated transaction; it will be an auction. The primary dealers for Austria put in the bids in the system and at 11:00am we will allocate.

You mentioned some of the types of investors that were looking forward to this new product. Could you give a bit more detail on who you anticipate the audience will be for the green T-Bills?

Money market funds in the ESG sector, asset managers and central banks as well as bank treasuries, looking to park green cash for the short-term.

Is there an advantage to Austria in doing green T-Bills? No other sovereign has done it before.

The advantage is that hopefully — and a lot of discussions in the last couple of days have showed this is the case — it will further broaden our investor base. For example, we have spoken with money market funds which we have never spoken to before.

As in our green bond, where we observed around 20% new investors, hopefully, we will see this as well in the T-Bill market.

And if you look at the overall eurozone government bond market, the one big elephant has left the room, which is not buying any more on a net basis. Therefore, the clear advantage for Austria would be if we have additional investors and at the same time broadening the green securities investment universe. 

Where did the desire to do green T-Bills stem from? Was it a Treasury-driven initiative to meet new investors? Or was there demand from investors that you have responded to?

Both. We discussed it internally as well as with our structuring adviser banks. They told us nobody did this in the past and but that we could have some calls with investors and ask them for their view on it. It was a step-by-step approach.

Originally, it was more driven by us, due to the fact that we are increasing our green financing year by year, and we did not want to exclude the maturity range of up to one year. And during our inaugural green bond roadshow the feedback from investors on the possibility of issuing green bills was very positive.

For smaller green issuers it makes no sense, for example, if you have only €2bn of eligible expenditures to fund in three years but our plan is that we will increase our eligible expenditures over time.

Therefore, it is a logical step to include all points on the curve. We do not plan to do a 100 year green bond at the moment, but T-Bills are a logical next step.

One billion euros a year — it’s not a lot. Did investors say anything about liquidity?

Yes, there are some concerns on the one hand, but on the other hand, investors know if you have only a three month investment horizon, it's not a necessity to trade day by day. Most T-Bill investors are rather buy and hold.

The feedback from investors was that it would be better if we issued higher volumes and that is possible after next year, we will have €2bn and the year after €3bn and it increases like a snowball. Therefore, we will increase the liquidity and this should help investors.

So far, you’ve done one green bond and you've got the green T-Bills coming up. Is there any other sort of thematic issuance Austria would consider — socially themed issuance or sustainability-linked bonds, for example?

No. Austria is a relatively small issuer, we account for around 3% of eurozone sovereign funding. And therefore, our strategy is to have on the one hand conventional bonds, bills and commercial paper, and on the other hand, the green bonds, bills and commercial paper.

We have a clear focus on these pillars. There will be no social bonds, no inflation-linked bonds and no sustainability-linked bonds. We are a too small issuer to have three or four different strategies and pillars for our borrowing.