BNP Paribas team Dec

A cross-bank effort demonstrated bond tokenisation’s potential in project finance and other types of bond issuance, even for smaller issuers. Edward Russell-Walling reports.

BNP Paribas has structured and distributed the first ever tokenised renewables project finance bond. With proceeds used to refinance a small solar energy project, the bond was the combined work of different teams from BNP Paribas’s Corporate and Institutional Bank (CIB), including digital and securities services, together with BNP Paribas Asset Management.

As the bank explains, tokenisation in finance refers to the issuance of securities as native digital assets, which means they can be recorded, moved and stored on the blockchain in a transparent way.

The benefits of tokenisation are generally reckoned to include reduced ticket sizes, lower issue costs and increased liquidity. At least some of these were behind the creation of BNP Paribas’ new product.

“When it comes to issuer needs, there are a lot of requirements to finance small projects,” explains Anh Berger-Luong, head of real assets at BNP Paribas CIB. “That’s a challenge for us as a project finance team.”

Technology is one of three themes in the bank’s current 2025 strategic plan, alongside growth and sustainability. “Tokenisation is being developed as part of our digital plans,” says CIB chief digital officer Arnaud Boyer.

A joint effort

Under those digital plans, launched some years ago, the CIB has also created a digital assets platform called AssetFoundry, headed by Julien Clausse. AssetFoundry offers scalable digital assets solutions, covering all elements of tokenisation, from legal and compliance to technology and business processes.

Ms Berger-Luong explains that, while she and her team were pondering solutions for small project financings, Mr Boyer and Mr Clausse approached them suggesting that tokenisation might be the way to go.

When it comes to issuer needs, there are a lot of requirements to finance small projects

Anh Berger-Luong

“We realised that if we could standardise it, we could then scale it up,” says Ms Berger-Luong, adding that the tokenised bond is targeted at transactions generally below €50m of debt. “So, to make the product marketable, it had to be highly systematised: simplifying without compromising on due diligence and structure. We needed to protect the credit quality of the asset.”

A token is a ‘wrapper’ that can encapsulate value and data. In this case, both the bond term sheet and environmental, social and governance (ESG) data are embedded in it, based on more than 40 legal and other documents. “We produced a single due diligence report, covering both technical and legal aspects, for which we asked the advisers to work jointly,” says François de Montalivet, CIB director, energy, resources and infrastructure project finance, Europe the Middle East and Africa.

“We were doing this for the first time, and it required a huge amount of work to standardise,” he adds. “This is something we would normally do on a highly customised basis for large projects.”

A bond requires investors, whatever form it takes, so the next bank unit to be consulted was the infrastructure debt team at BNP Paribas Asset Management, headed by Karen Azoulay.

The asset management team makes the point that innovation and diversification are important to investors. “One path of innovation is to diversify your portfolio by access to smaller transactions,” says David Bouchoucha, head of private debt and real assets at BNP Paribas Asset Management. “But the key challenge is: how do you do that?”

Mr Bouchoucha notes that asset managers cannot afford to compromise, so if they are to consider very small deals, they need something that is very standardised. “It needs to be simple to read,” he says. “We have to avoid spending time on each transaction and must be able to work on them as a group.”

Access all areas

The final element to be addressed was custody. Cécile Theulle, digital asset programme manager at BNP Paribas Securities Services, notes that while custody has been working on extending its existing service to digital assets, this trade was its first chance to do so in a real environment.

“This was an opportunity to engage all areas of the organisation in building the foundations for future custody,” she says. “We are developing partnerships with specialist technology providers including Metaco and Fireblocks.”

Metaco and Fireblocks specialise in institutional digital asset custody, keeping the private keys to public blockchains. Blockchain, the distributed ledger technology (DLT) used to record and store the tokens, uses cryptography to ensure immutability and trust of the ledger.

This was an opportunity to engage all areas of the organisation in building the foundations for future custody

Cécile Theulle

The bank is also working with regulators and the central bank to pave the way for these products, including post-trade settlement on the chain.

“Blockchain was ready-made for our strategic objectives, because it’s important to be agile, and tokens can carry many different characteristics,” says Mr Boyer.

He insists that the bank is not doing this just for the sake of using blockchain but because, as with any technology, it lowers the entry cost for certain users. “Amazon used the internet to distribute only 100 copies of a book,” he says. “This is similar. Blockchain can encapsulate value and efficiency in a granular way.”

Fixing the ceiling

One of the challenges was to integrate tokenisation with the bank’s existing systems. “Issuance of a tokenised bond typically involves more than 90 different steps, and we had to be careful how we integrated it with our legacy systems,” says Mr Clausse. “Ultimately, it’s a bond and clients want to be served the same way they were before, not by having to connect to another system.”

The project finance token project was led by the bank. Once it thought it had a solution, it looked at the market to see which underserved segments might be able to use it. Having settled on €50m as a suitable ceiling for project size, the team needed multiple projects that were more or less similar.

Solar energy projects fitted that profile, and had the additional virtue of aligning with the sustainability pillar of BNP Paribas’s strategy. “We discussed this with our clients and [state-owned French energy utility] EDF said it wanted to do a trade,” Mr Boyer reports.

The resulting transaction conformed in most ways to the traditional project finance model. The borrower was EDF’s rooftop solar subsidiary, EDF ENR, which used the proceeds to finance operations. The bond was bought by BNP Paribas Asset Management, which allocated it to one of its investment funds. BNP Paribas Securities Services managed the post-trade custody.

To ensure clean energy usage of the blockchain, utility tokens were minted with renewable energy by Exaion, an EDF subsidiary. The transaction also tested token reversibility, as the tokenised bond was seamlessly switched back to a traditional bond, described by the bank as a key element for the business continuity plan. Issuance took place on the public Ethereum blockchain, under French law for unlisted securities.

Under the EU’s DLT Pilot regime, only unlisted securities may be tokenised for the time being. After March 23, 2023, however, the door will be opened for listed securities.

Investors approve

At only €100,000, the size of the tokenised bond was very small, with an unspecified yield. “It was a matter of how low we could go while still targeting qualified institutional buyers,” explains Mr Clausse. “That forces us to have the right approach, standardising the way we distribute debt so that it is efficient.” He accepts that at this level the product is not viable but says that, as a successful experiment on blockchain, it has created many opportunities and generated useful intelligence on the addressable market.

“We have had a lot of enquiries and we are in contact with other potential clients,” Mr Boyer says. “Though the token framework has been developed for French law, we could issue international bonds as well.”

So far, the investors seem happy. “As asset managers, the fact that technology lets us look at the token as a bond makes it easier for us to deal with it,” Mr Bouchoucha says.   

As concerns rise over so-called greenwashing, the embedding of ESG data in the token adds another layer of transparency. The bank believes that this could be a game-changer for ESG deals. “Tokenisation will transform ESG-linked financing,” Ms Berger-Luong reckons. “It provides transparency, scale, better granularity for smaller amounts, and verifiability of ESG data across the whole value chain.

“This could introduce a more efficient financing system for smaller renewable energy projects, offering dynamic bundling opportunities to investors.”

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