De Volksbank European green Tier 2 first aligned with overall strategy

De Volksbank issued the first green Tier 2 issue from a European bank on 15 July, a €500m 10.25 non-call 5.25 transaction that was almost four times oversubscribed and priced through fair value, as the issuer aligns its funding with its strategy of being climate-neutral by 2030.

The Dutch bank published its green bond framework in April 2019 and last September debuted with a €500m senior preferred deal.

De Volksbank’s overall strategy includes having a 45% climate-neutral balance sheet this year, rising to 100% by 2030. High scores from sustainability rating agencies include being ranked in the top three worldwide in ISS-oekom’s “financials – mortgages and public sector finance” category last year.

“With our underlying sustainability strategy of going climate-neutral by 2030, including our Scope 3 emissions, it is a very logical next step to issue everything in green format,” Sharon Bloemendal, green funding and ESG advisor at de Volksbank, told Sustainabonds. “And because we are a sustainable bank, we believe we should be at the forefront of such developments in the financial markets and we hope to set a precedent for other banks to follow – as long as they have similarly strict criteria and a strong underlying sustainability strategy, because it is not only about the use of proceeds, but also what you contribute on environmental issues as a financial institution.”

A week before de Volksbank’s Tier 2, BBVA on 7 July sold the first green Additional Tier 1 (AT1), a €1bn perpetual non-call 5.5 year instrument, but many market participants expressed scepticism about the appropriateness of using the standard use-of-proceeds green bond model for the perpetual and equity-like instrument.

De Volksbank’s landmark green Tier 2 issue was more consensual.

“AT1 may be a different ball-game because of its perpetual and capital characteristics, but from senior to Tier 2, it’s a very similar concept,” said Joop Hessels, head of green, social and sustainability bonds at ABN AMRO, joint bookrunner on the Tier 2 and one of the arrangers of de Volksbank’s programme.

He also highlighted de Volksbank’s sustainability ambitions as making the subordinated instrument appropriate, and further noted that the earmarked green assets comprise residential mortgages against energy efficient properties, with the Dutch housing loans typically being long-dated and well beyond the maturity date of the bond.

Some market participants have suggested that tying subordinated issues to green assets could introduce an incentive to redeem should insufficient assets be available – with such an incentive making them ineligible for capital treatment – but, according to Bloemendal, after discussion with the Dutch central bank in conjunction with the European Central Bank, the issuer got confident and comfortable that as long as the documentation contains no language implying such an incentive, there are no regulatory problems with such green Tier 2.

With its green bond framework already established and inaugurated, de Volksbank could approach the market at relatively short notice, announcing its planned deal on Monday of last week and holding investor calls, before launching the deal on the Tuesday.

Leads ABN AMRO, BofA, JP Morgan, Nomura and UBS went out with initial price thoughts of the mid-swaps plus 240bp area for the €500m no-grow transaction, and after three hours set guidance at 215bp plus or minus 5bp, will price in range, on the back of more than €1.75bn of demand. The deal was ultimately priced at mid-swaps plus 210bp on the back of more than €1.9bn of orders, with €1.75bn of demand from more than 120 accounts good at re-offer. The leads put fair value at 210bp-220bp over, implying a zero to negative new issue premium.

Some 73% of the bonds were placed with accounts citing an ESG investment strategy.

“It was a positive signal that so many were able to join,” said Hessels at ABN AMRO. “For the dedicated green funds with specific criteria, Tier 2 might be a little easier than AT1, which might not automatically be included in their dedicated green bond portfolio.

“Those investors that don’t have a separate green bond fund but are focused on sustainable investment, they look at the whole spectrum of products and a Tier 2 is interesting because it offers a nice pick-up versus the other types of bonds out there. Outside the banking sector, we have seen many corporates and also insurance companies issuing green hybrids before.”

Asset managers were allocated 76% of the bonds, insurance companies and pension funds 11%, banks and private banks 7%, central banks and official institutions 5%, and others 1%. The Nordics took 29%, the UK and Ireland 23%, the Benelux 18%, Germany, Austria and Switzerland 15%, France 7%, southern Europe 6%, and others 2%.

Bankers said the success of the first European bank Tier 2 should encourage other banks to issue – subject to their having needs for the subordinated instrument.

Next up in de Volksbank’s issuance plans could be a covered bond, according to Bloemendal, although she noted that the bank has enjoyed an influx of savings during the crisis, easing its wholesale funding needs.

She also said that while all the bank’s senior bond issuance will now be in green format, it has yet to decide how best to tackle covered bonds, even if it has sufficient assets (some €800m) and a framework that would make green covered bond issuance possible.

“If a bank defaults, then both green and other investors have a claim on the same pool of assets, and we don’t believe that is necessarily appropriate for a green bond,” said Bloemendal. “So we think that establishing a separate green covered bond programme may be more appropriate.

“However, we are undecided and need to consider this further.”

De Volksbank will be updating its green bond framework later this year to reflect enhancements to its overall ESG strategy, and Bloemendal said the bank will be considering how best to address two new social KPIs that will be adopted. In this respect, new Sustainability-Linked Bond Principles could prove interesting, she said.

“We will be looking at how we can connect these social KPIs to the framework and quantify them, and maybe we can set up a sustainability framework in which all those guidelines are incorporated, so we don’t have to have a separate green bond framework or a separate social bond framework or a separate sustainability-linked framework,” said Bloemendal. “This could fit our bank very well.”

ABN AMRO