Green, social and sustainability bonds, like the rest of the debt market, have come under pressure due to the Covid-19 pandemic. Investors have turned risk averse, and eager to unwind their bond positions in some cases.
Sean McNelis, global co-head of DCM at HSBC in Hong Kong, says that the global sell-off has been “extreme,” perhaps even more so than in 2008. “It has required issuers and investors to think again about plans for 2020,” he adds.
That has involved looking at new places and styles of funding, such as through local currency markets, private placements or loans.
But as borrowers get creative, the outbreak of Covid-19 has also inspired a new type of social bond that specifically targets relief from the pandemic.
It began in China’s domestic bond market in early February, with a mix of policy banks, hospital builders and pharmaceutical companies becoming the first batch of issuers of Covid-19 relief bonds.
In some cases, the deals were tagged as ‘novel coronavirus prevention bonds’; in other cases, issuers simply earmarked a chunk of their bond proceeds to combat the pandemic. The regulator also introduced a faster registration process for virus-related debt issuance.
The offshore market quickly caught up too. At the end of February, Bank of China sold a landmark Hong Kong dollar and Macau pataca denominated social bond. The proceeds were to help small and medium enterprises (SMEs) that are suffering because of the virus.
South Korea’s Shinhan Bank followed suit with a $50m privately placed Covid-19 relief bond that will also be used in part to help SMEs. The remaining money was earmarked for medical related items.
For the trade’s single investor, the bond provided an opportunity to fight the pandemic through the capital markets.
“Investors, like everybody, would like to try their best to support [the relief efforts],” says Luying Gan, head of sustainable bonds for Asia Pacific at HSBC. She adds that capital market participants are in a unique position to put their money to work, by channeling funds to projects that alleviate the negative impact of Covid-19.
The Indonesian sovereign, for one, took $4.3bn from the international bond market in early April. Part of the proceeds will go towards the country’s relief efforts.
Covid-19 related issuance in Asia, outside of onshore Chine, is still relatively small. But interest for these types of deals is very much there.
McNelis says that HSBC is looking to do similar virus relief trades for other borrowers, including some in China, South Korea, Australia and other parts of Asia.
He says other issuers will want to follow suit, and multilateral institutions may encourage issuance by providing guarantees.
Chaoni Huang, head of sustainable capital markets, global markets, Asia Pacific, at BNP Paribas in Hong Kong, says: “The virus has really exposed some big questions, like are our healthcare systems sufficiently robust. The capital market needs to do more to plug funding gaps across core global services, including healthcare.”
Social bonds draw new attention
An additional benefit to the Covid-19 linked social bonds is that they turn attention to a part of the SRI market that has not had much attention in Asia or elsewhere.
There have been just a few social bonds in the region, but issuers are more likely to use a “sustainability” label, which incorporates both green and social use of proceeds.
Of the $274bn of sustainable bonds sold globally last year, only 5% designated their proceeds for social projects, according to Huang.
The BOC deal was the first offshore social bond from China.
But other banks, and even some corporate issuers, can follow the BOC template to put their money to work in ways that they previously didn’t consider a “social” effort.
“Covid-19 raised many people’s awareness of social bonds, which is a newer and smaller stream than green bonds,” says Gan.
Social uses of proceeds can be easier to identify for banks, because they provide lending support to such a broad range of sectors, she adds.
It is not as straightforward for corporates, however. Before something like the global pandemic happened, it was difficult to identify social projects for companies.
One catch is the designated use of proceeds. For issuers using a portion of a bond to finance something socially related, such as aid for SMEs, but another portion for general corporate purposes or working capital, a social bond label is deceiving and will not hold up with international investors.
“It’s only technically a social bond if all of the proceeds are used for [social] purposes,” says McNelis.
While that may challenge some issuers and keep deal sizes relatively small, McNelis says banks could still sell bonds of $500m or more, as so many parts of Asia’s local economies will be damaged by Covid-19.
One industry source says he is sceptical that traditional environmental, social and governance (ESG) investors will be eager to buy Covid-19 related notes.
“There’s still going to be this kind of hesitancy to embrace that, even with the panic,” he says. “There’s legitimately some opportunity here, and anything that can help fund virus prevention is a good thing, but is this going to be a new asset class?”
Additionally, the source is wary about assuming that virus related social bonds will bring more enthusiasm for social bonds generally in the region. He says it is apparent that China is interested in virus bonds, not social bonds, and he does not think this will spur issuance of social bonds with other uses of proceeds.
McNelis believes that a lot of the Covid-19 related bonds will be kept to domestic markets.
“This is such a significant event for global economies and markets that all clients, regardless of sector, are considering their need to raise funding in the next couple of months,” he adds.
Huang says that banks will be the best candidates to issue Covid-19 relief bonds. SMEs will be some of the worst hurt as a result of the pandemic, and they’ll face cash flow problems in the short term. “They definitely need to see support from the banking sector,” she says.
In some ways, the woes from the pandemic reflect a reversal of the financial crisis, when the banks had to be bailed out by the governments, says the industry source.
“There is a sense of: ‘wait a minute, maybe the banks should be helping the government [this time]’,” he says. Banks will have to step up to lend to economies that can’t handle the social weight of lost wages and other burdens. “It’s about finding ways in the capital markets to fund industries that need it right now, and fund governments that need it,” adds the source.
For McNelis, the Covid-19 social bonds are an obvious extension to the ESG principles many companies already consider. As governments around the world turn to the private sector to help restore and support local economies, there may be government support for such initiatives by the private sector.
Planting seeds of green
This year was expected to be another record setter for green bond issuance. In 2019, nearly $207bn was raised globally, up from the $148bn of green debt sold in 2018, according to Dealogic. In Asia, the number grew to $48bn in 2019 from $44.1bn in 2018.
Through April 1 this year, just $42.6bn of green notes were sold globally, and $4.5bn of that came from Asia ex-Japan. Now it is uncertain how much growth there will be.
The appetite for green issuance has not gone away, but it is on the backburner.
“We’re seeing a very different dynamic than the volatility we saw last year with the China-US trade war,” says Huang. “That volatility makes it difficult [to issue green bonds]” Still, Huang says she is speaking with potential issuers on a regular basis about the potential for green bond sales in the future.
Gan says now is the time for issuers to set up their green bond documents and get ready for a window to execute deals. If they do not already have frameworks in place, the quietening of the capital markets can present the perfect time to focus on activities such as this.
The industry source says that green funding could gain attention after the pandemic dissipates, as people realise the effect of human beings on the world.
“Everyone’s kind of thinking it, but everyone’s afraid to say it on the record, including me,” he says.
He points to lower carbon emissions from China during lockdowns, as well as the various stories of cleaner water and animals returning to natural habitats around the world. “If you do the math, how many lives is that saving?” he asks of the reduced emissions.
“People in the industry are thinking these things,” says the source. He sees this as an opportunity to make changes when things go back to normal.
Investor enthusiasm blooms
While investors may have few options to buy in the primary market right now, the pandemic may shine a light on the values of ESG for the buy-side as well.
“Increasingly, we see the ESG considerations fit into the bond discussions,” says Gan.
In the past, ESG was more of a consideration for equity investors, she adds. As a result of this shift, investors may even look at a conventional bond through an ESG lens. This means that they will examine how the issuer and the use of proceeds rate.
“They don’t only look at them as a credit, they increasingly factor in ESG considerations too,” says Gan, explaining that for investors, this shows future value.
Huang is optimistic about the potential for SRI bonds. Investors have proven supportive, and are now opening up to ideas like “transitions bonds,” which allow companies to use their proceeds to become more environmentally friendly. This is often helpful for industries that are not traditionally green.
“When the market conditions improve, there’s no reason for sustainable bond [issuers] not to come back and take advantage of the market,” says Huang. GC