The unexpected benefits of being green
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The unexpected benefits of being green

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Green bonds have always offered borrowers more than just a way to feel good about themselves

Green bonds have always offered some tangible capital markets benefits to borrowers apart from the feel good vibes of funding some goodness in the real world, from greeniums to calming investor nerves during Covid lockdowns. But this month, another significant boon to what it can offer issuers has come to light — defence when your business is in trouble.

S&P downgraded Danish green energy company Ørsted, the world’s biggest offshore wind company, this month after it published a new, lower growth, strategic plan. S&P now rates Ørsted at BBB; not a damning credit rating, and there is no whiff of default, but it suggests the company’s trajectory is headed in the wrong direction.

Ørsted recognises its problems. It is slashing up to 800 jobs, suspending dividend payments until 2027 and gutting the funding for new projects.

This all comes after the company took a €4.8bn-equivalent impairment, mostly from scrapping two projects in the US because of rising costs.

In September, when Moody’s moved the company's ratings outlook from stable to negative, Ørsted’s share price fell off a cliff, plunging from Dkr559.4 to Dkr383.80 over the month. It hasn't recovered since.

These are bad times at Ørsted, but one wouldn’t necessarily guess that by looking at the company’s bond spreads.

The longer end of the company’s curve barely budged on the S&P downgrade, even though it seems almost certain that Moody’s will follow suit — it already has the company on a negative ratings outlook.

Part of the apparent apathy in the bond market can be explained by Ørsted’s recovery plan. Less money being spent on things like dividends, staffing and new projects, which means more money to pay back debt.

Green for life

However, there is more at play. All but two of Ørsted’s bonds carry environmental, social and governance labels. Of those, all but one are green bonds — the odd lot is a lesser spotted blue bond.

ESG investors tend to buy and hold their conventional debt peers. This makes sense as ESG investors — especially dark green investors with a much stricter buying mandate — already have a limited pool of securities they can buy.

A frequent complaint among green bond investors is that they wish there was more paper to buy. Once they get their hands on green bonds, they need a compelling reason to let go of them again.

This acts as a buffer to bad news for a company. No selling means no spread widening.

Whether that keeps funding costs down at the next round of debt raising remains to be seen. However, it is an undeniable benefit of a verdant debt pile that investors do not want to sell it.

ESG debt has a history of benfitting issuers. Initially, it was the greenium that they saved versus conventional issuance, which helped to pay for the rigmarole of reporting on how the proceeds were spent. This has dwindled as green bonds become more commonplace, and many argue it no longer exists at all. But borrowers will still deploy a green label in tough times to try and drive some extra orders from green-only investors.

Investors looked at companies with an established ESG borrowing programme favourably during Covid too — the idea being that companies with the time and breathing space to consider sustainability were less likely to be heading down the toilet than those scrabbling for money to keep the lights on.

Now Ørsted has demonstrated that although it isn't easy being green, you look much less of a muppet when things go against you and you can rely on your investors to sit tight. Other issuers should take note that green bonds are worth issuing for a rainy day.

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