Moody’s slashes green bond forecast but covered a bright spot

The green bond market could grow by as little as 13% this year, according to Moody’s, which has slashed its forecast after having previously anticipated a 60% rise in issuance. The rating agency nevertheless noted increases in sustainable and social bond issuance, and highlighted covered bonds’ potential.

In a report on Wednesday, Moody’s noted that green bond issuance – based on Climate Bonds Initiative figures and classification – rebounded in the second quarter of 2018 to $44.9bn (EUR38.6bn), the second highest issuance in the decade-long history of the market and 20% up on the second quarter of 2017.

However, after issuance in the first quarter was relatively low – at $31.9bn, down on Q1 2017 – the rating agency said the pace of supply remains well below initial expectations, with issuance in the first half only 7% up on the first half of 2017 to $76.7bn. It has therefore lowered its full year green bond issuance forecast from $250bn to $175bn-$200bn (versus $155bn in 2017), even though the fourth quarter has typically been the busiest. In January Moody’s forecast at least $250bn of supply for 2018, representing growth of over 60%.

“While we expect a more active second half of the year, this is unlikely to fully offset the growth moderation seen during the first six months of 2018,” said Matt Kuchtyak, an analyst at Moody’s.

Green bond proponents have stressed that a doubling of issuance annually is needed to hit a $1tr per year rate by 2020.

The rating agency attributed the slower growth to rising interest rates, which it said has weighed on debt issuance globally, noting that first half sovereign, supranational and agency supply was down 10% versus H1 2017 and corporate issuance down 6%, with financial institutions issuance roughly flat.

Issuers’ increasing focus on social, sustainability and other labelled bonds could be infringing on green bond issuance “at the margins”, the rating agency added, noting that $8bn of sustainability bonds and $5.1bn of social bonds were issued in the first half, representing growth of 59% and 14%, respectively, according to figures from Dealogic.

“While these are still small markets, we expect them to grow over time and potentially shift some issuance away from the green bond market,” it said.

After sovereign issuers were more prominent in green bonds in the first quarter, global corporates accounted for more than half of green bond issuance in the second quarter. Financial corporates played a much more significant role, with their share of issuance increasing from 10% in the first quarter to 37% in the second.

Covered bond growth could outpace wider mart

Moody’s struck a more positive note on the green covered bond market after five benchmark green covered bonds were issued in the first half of 2018, compared with two in the whole of 2017.

“We expect the market for green covered bonds to continue growing in line with the broader green bond market, and perhaps even at a faster pace,” said the rating agency.

It added that as the European Central Bank is now gradually reducing its purchases of covered bonds, there is greater potential for a broadening of covered bonds’ investor base to include investors with green and sustainable mandates. Debutant green covered bond issuers have recently cited a desire to expand their investor base to mitigate the ECB’s withdrawal as being among the attractions of the green product.

“From an issuer’s perspective, green covered bonds can be issued off an existing covered bond platform, reducing the operational and administrative burden and potentially making investment in green bond credentials more cost efficient,” added Moody’s.

Significantly, this year’s deals have included the first to be backed by residential mortgage loans – namely inaugural issues from SpareBank 1 Boligkreditt and DNB Boligkreditt – Moody’s said, noting that the collateral is by far the most commonly used for covered bonds.

“The SpareBank 1 deal contained two features we expect to be widely replicated in the future,” said Moody’s. “The first was that the bank stated its intention to maintain a sub-pool of cover pool assets meeting eligibility criteria for energy efficiency, up to an amount at least equal to the outstanding green covered bonds. This feature explicitly links the green covered bonds to the use of the proceeds from these bonds to fund green assets.

“The second feature was the use of building codes and an intent to use energy performance certificates, when available, as the markers for green mortgages. This approach has the advantage of being relatively simple and transparent.”

Photo: Valter Campanato/ABr/Wikimedia Commons

ABN AMRO