NordLB plots first ‘really green’ covered bond under Luxembourg law

NordLB Luxembourg Covered Bond Bank is preparing to issue what it expects to be the first covered bond backed by renewable energy assets and launched under a dedicated law, with its debut likely in early 2019, according to officials at the issuer.

The new law – the world’s first green covered bond law – was approved by the Luxembourg parliament and subsequently entered into force last month. It creates a framework for a new covered bond product backed by renewable energy assets, lettres de gage énergies renouvelables.

To date, green covered bonds have only been issued to finance mortgages for energy efficient commercial or residential properties and – in one instance – sustainably forestry assets.

NordLB Luxembourg Covered Bond Bank (CBB), a subsidiary of Germany’s NordLB, is understood to be the most advanced in preparing to issue a deal under the new framework.

“Certainly we want to be the first mover,” Thomas Keith, managing director, financial markets and loans, at NordLB Luxembourg CBB told Sustainabonds. “We have spoken to many banks that are interested in this project, but as the only issuer currently active in the Luxembourg covered bond market it seems clear that we will be the first.”

NordLB Luxembourg CBB is still in the early stages of preparing to issue a deal, he said, with issuance expected in early 2019.

The first issue is expected to be denominated in euros, and Keith said the size of the deal depends on the growth of the loan portfolio in the meantime, but the issuer will target a size of at least EUR300m in order for the deal to be added to certain indices. He said it is too early to say how large the cover pool will be.

The bank is keen to issue green covered bonds as it has previously financed its lending to renewable energy projects through senior unsecured issuance, said Keith, and sees relative pricing benefits of the new secured product. NordLB has been active in renewable energy financing for more than 20 years.

“As NordLB is one of the big pioneers in renewable energy it is obvious that we would be looking for funding opportunities that are better than senior unsecured, and that is the reason for this green covered bond product,” he said. “In addition, by financing renewable energy projects, it is our aim to open up new, attractive markets for our investors and to support sustainable development.

“With the green covered bonds in Luxembourg, capital will be brought together to fund sustainable climate projects in the field of renewable energy.”

International potential advocated

NordLB Luxembourg CBB is the only issuer that has been active in the Luxembourg covered bond market in recent years, since making its debut in 2015, but banks from other countries could make use of the new framework.

The law can only be used by Luxembourg mortgage banks, but as there are no geographical restrictions, the framework can be used by banks from other countries through a Luxembourg subsidiary.

“We would like to have more banks coming to Luxembourg and issuing under this law, because if there is only one issuer, some investors will ask if it is worth their time looking at the market,” added Keith. “Renewable energy is a topic for the future, and therefore I believe there will be some followers.

“The green trend in Luxembourg is opening doors for greater business potential that is making a contribution to conserving global resources.

“When the concept has been proven by us, I am sure there will be other banks looking into it.”

Hagen Schmidt, senior funding manager at NordLB Luxembourg CBB, said a potential hurdle is that banks that do not already have an entity in Luxembourg would need to acquire a special banking license, but noted that many banking groups already have subsidiaries in the country.

“The range of assets that can be financed under the law is broad – the definition in the bill reflects the understanding of renewable energy taken from the EU Directive on the ‘use of energy from renewable sources’,” he said. “It’s not just for energy production projects; it’s also for storage, for transport, for transmission – as long as it relates more than 50% to renewable energy.

“There is a very broad range of possibilities, and we hope and are confident that other banks see this advantage.”

Schmidt added that this should also be attractive to investors.

“A lot of green investors are looking for diversification of sustainable investments, and we would like to strengthen the market for green bonds by attracting new investors to lettres de gage énergies renouvelables,” he said.

Regulation ‘strong and tough’

Under the new law, covered bonds can be backed by renewable energy assets including but not limited to wind, solar, geothermal, hydrothermal, hydropower and biomass projects.

“We are quite happy with the framework from the finance ministry,” said Keith. “This will be the first really green covered bond, with a green law behind it.

“Our cover pool will be ‘naturally’ green, meaning the cover pool will be defined by the law on lettres de gage énergies renouvelables and we cannot get brown and green bond issuance out of the same cover pool, which is possible in other countries.”

Keith said NordLB Luxembourg CBB is at first likely to concentrate on financing wind projects through its covered bond issuance, as these make up the bulk of its lending, but said “the door is open” for other types of projects, such as solar, biomass and energy storage.

It will mainly seek to finance projects located in Europe, but could also finance assets from elsewhere.

“Diversification in the pool is always positively rewarded by rating agencies,” he added.

In March, before the final law was approved, Moody’s said the use of renewable energy assets as covered bond collateral would bring extra risks versus traditional collateral, because such cover pools will be exposed to the operating risks and economic success of a diverse range of renewable energy projects, and would also likely be significantly more concentrated than traditional mortgage cover pools.

Schmidt said such risks are mitigated by LTV rules that will be dealt with in an accompanying circular to the law and which are yet to be published.

“I believe this regulation on how to calculate lending values is a strong and tough and should support this new covered bond product,” he said.

Keith said he is confident that investors will accept the product created by the legal framework.

“The bill is opening up new opportunities for capital-rich green investors to fund the energy transition with their investment,” he said. “We have already discussed the project with banks and we can see there is definitely a need for this product.

“I think we will reach both the traditional covered bond and the typical green investor. I am sure that this is a product that the market needs and that the market will buy.”

ABN AMRO