Subordinated green corporate debt is still a rare sight in Europe, largely limited to energy companies and utilities. German utility EnBW printed €500m of 60 non-call six year green hybrid debt on Monday, its third time since it started printing subordinated green debt in the summer of 2019.
Engie, Iberdrola and EDP have all printed this type of debt, while Tennet is planning on issuance this year.
More corporates need to get involved. Since the coronavirus pandemic rattled capital markets and sent central banks into buying more bonds than ever before, two things have shown themselves to be true that make green hybrids more viable than ever: investors love sustainability-linked bonds and the hunt for yield is back.
Environmental, social and governance (ESG) funds saw an inflow of money during the darkest days of the coronavirus crisis in the financial markets, against money fleeing conventional assets elsewhere. This was down to a number of factors: the extra reporting needed for ESG issuance gave investors some comfort that there would be few scary surprises hiding in their balance sheets; the type of company issuing ESG debt have generally been defensive investments and in sectors that have government support; and there was a natural feel-good sentiment that ESG investing was a good way to fight the pandemic.
These factors have created enormous demand for ESG assets that corporate bond bankers are scrabbling to take advantage of now, with many expecting the market to be supercharged for the rest of the year.
At the same time, hybrids have been winning a lot of love from investors because the European Central Bank is snapping up senior corporate debt at around double the level it was at the start of the year thanks to its Pandemic Emergency Purchase Programme. This has led to sharp spread compression in the senior market, making riskier, higher yielding debt like hybrids highly sought after.
It’s not just investors benefitting. Hybrids are a key tool in rebuilding balance sheets shattered by the pandemic. Leverage ratios are already going to appear distorted when the next round of earnings reports come out next month because earnings have taken such a huge hit.
This all points to one thing: green hybrids are an excellent financing tool for these strange times. Expect and hope to see more of them.