2020-04-04 IFR Magazine

12 International Financing Review April 4 2020

Top news

Boom time coming as SSA borrowers

ramp up plans for ‘Covid-19 bonds’

„ People & Markets Careful structuring needed to meet criteria and avoid confusion

BY TESSA WALSH

The rush to issue Covid-19 social

bonds is bringing new business

to capital markets as SSA issuers

scramble to deploy bigger

budgets, but the deals will have

to be carefully structured and

monitored to avoid concerns

about “social washing”.

The rapid rise of social bonds

related to the coronavirus

pandemic is expected to cause a

rebalancing with the larger ESG

bond market, but the explosion

of different types of deals to

lGHTûTHEûPANDEMICûPROMPTEDû

ICMA to issue guidance last

week on the types of deals that

qualify.

“In the last few weeks, we’re

seeing a rebalancing between

green and social,” said Agnes

Gourc, co-head of sustainable

lNANCEûMARKETSûATû".0û0ARIBASû

“The climate emergency is still

there, but we’ve got a new

emergency now.”

Last week the EUROPEAN

INVESTMENT BANK launched a €1bn

sustainability awareness bond

that extends eligibility to areas

OFû%)"ûlNANCINGûDIRECTLYûRELATEDû

TOûTHEûlGHTûAGAINSTûTHEû

pandemic.

That followed the agency’s

announcement that it will

mobilise up to €40bn to support

European companies, health

interventions, and the economy

BYûlNANCINGûURGENTû

infrastructure improvements

and equipment needed in the

health sector.

The COUNCIL OF EUROPE

DEVELOPMENT BANK also launched

a “Covid-19 response social

inclusion bond” and NEDERLANDSE

WATERSCHAPSBANK raised a €2bn

social housing bond, following a

“response bond” from the

NORDIC INVESTMENT BANK that is the

lRSTûTOûlNANCEûSOCIALûSECURITY

A wide range of social bonds

is being assembled at high speed

as banks and issuers adapt the

sustainable “use of proceeds”

format to attract investors keen

to contribute but who need

clarity and accountability over

the spending.

h7EREûSEEINGûTHEûSPECIlCûANDû

increasing attention of investors

to environmental and social

aspects in the crisis we’re all

experiencing,” said Aldo

Romani, head of sustainability

funding at the EIB. “Investors

want to engage and are looking

for instruments to do something

meaningful.”

NEW BUSINESS

4HEûDIVERSIlCATIONûOFûSOCIALû

bonds into healthcare,

employment and social security

as SSA issuers deploy bigger

budgets is extending capital

markets issues into new areas

that have not traditionally been

lNANCEDûBYûCAPITALûMARKETSûANDû

is bringing in new mandates

and business for banks.

Smaller supranationals could

see budgets nearly doubling as a

result of the crisis, bankers say,

and the budgets of larger

supranationals could increase

by billions of euros as

governments struggle to

contain the crisis.

“All of the recent social bonds

are linked to new funds being

deployed by SSA issuers,” Gourc

said. “For the majority, it’s

either an expansion of their

mandate or an increase in funds

that they need to deploy.”

The explosion in social bonds

shows that the format can be

quickly adapted as SSA issuers

try to clarify the amount of

additional funding. The NIB and

EIB had a matter of days to

adjust their frameworks,

bankers said.

KEY PILLARS

The time-consuming work

involved in constructing

frameworks led ICMA to say

that they were not necessary,

but deals claiming to be social

bonds need to observe four key

pillars: identifying eligible

projects; evaluating and

selecting projects; managing

proceeds; and reporting on

impact.

“We’re encouraging issuers to

adapt these instruments to the

crisis, while giving guidance on

preserving their integrity,” said

Nicholas Pfaff, a managing

director at ICMA.

The crisis forced the EIB to

accelerate discussions to bring

its sustainability awareness

bond to market while

considering other areas of

investment and working out

how to quickly develop

eligibility criteria so that the use

of emergency funds are clearly

visible to ESG investors.

“We would not have seen the

kind of acceleration and

extension of the discussion

without the crisis,” Romani

said.

CORPORATES LOOKING

Covid-19 social bonds have been

issued by supranationals to date,

but corporates are also looking

at the format, particularly in the

healthcare space.

“The crisis has highlighted

the need to create clarity around

objectives and what we want to

achieve and to push banks and

technical and capital markets

experts to develop this clarity,”

Romani said.

NIB’s euro issue showed a

good distribution to asset

managers because of the ESG

angle, bankers said, and set a

benchmark for other SSA

issuers.

“All the other supranationals

are also looking at euros; as

borrowing requirements

increase, they will need access

to many different markets,” said

Jamie Stirling, global head of

SSA DCM at BNP Paribas.

“We will see more

developments in social bonds as

INVESTORSûGETûMOREûCONlDENTû

with new frameworks and use

of proceeds, and we will see an

increase in the number of

investors willing to look at

Covid-19 or response bonds,” he

said. „

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