BNP Paribas leads charge on Covid-19 response bonds

The coronavirus crisis has been a wrecking ball for economies and markets. As governments throw money at the problem, however, demand has arisen for the hitherto largely neglected ‘social bond’ – in this case, Covid-19 response bonds. The debt capital markets (DCM) and sustainability teams at BNP Paribas have been very active in the first wave of these surprisingly popular instruments.

At the start of this year, before the health crisis really began to bite, market conditions for sovereign, supranational and agency (SSA) bond issuance were particularly strong, says Jamie Stirling, global head of SSA DCM at BNP Paribas.

“Volumes were high, with most issuers ahead of their normal run rate. Then the world changed,” he says. As the number of virus-related deaths grew and the national lockdowns spread, the SSA primary market shut down. “There was massive dislocation in the secondary market, where the screens simply didn't reflect reality,” he adds.

Most SSA issuers remained well funded and were typically 40% done for the year by the end of February, according to Mr Stirling. But debt management offices were waiting for guidance.

Return to market

Then, as March progressed, it became more apparent how much it was going to cost to navigate the crisis. Sovereigns came back to market with a vengeance, with agencies and supranationals raising additional funds in support.

“A number of support packages were announced in response to the crisis, and some issuers looked at specific ways to fund those measures,” says Agnes Gourc, BNP Paribas’ co-head of sustainable finance markets. Enter the Covid-19 response bond, which helped to restore some calm to the market.

In socially responsible investing (SRI), the traded debt universe breaks down into green bonds, where proceeds are funnelled to environmentally beneficial assets or projects; social bonds, which address positive social outcomes; and sustainability bonds, which are aimed at a mix of the two.

Until now, green bonds have made up by far the lion’s share of SRI paper. In 2019, for example, they accounted for 80% of issuance. Sustainability bonds made up 15% of the total, with social bonds amounting to 5%.

The Covid-19 response bond is a classic example of a social bond. “They provide clarity for investors by identifying a project or asset, usually to support employment, by small and medium-sized enterprise (SME) lending, or healthcare systems,” says Ms Gourc. “One of the underlying concepts is that the risk for the investor is linked to the issuer, not the project.”

The bonds have enjoyed demand from central banks and sustainable investment funds, as well as from certain specifically green funds whose mandates allow limited investment into other types of SRI.

Nordic first

At the end of March, Nordic Investment Bank (NIB) launched the first such response bond in the European market, and the first for a European SSA issuer. Joint lead managers were BNP Paribas, Danske Bank, HSBC and JPMorgan.

NIB is owned by its member Nordic and Baltic countries, and finances projects that benefit their environments or improve productivity. Its €1bn three-year bond will fund loans to member countries and sustainable businesses facing economic consequences from the pandemic. That includes lending to the public sector, to the financial sector and to the real economy.

NIB published a framework spelling out its intended use of proceeds, which said: “Loans financed by NIB response bonds should support the provision of products and services contributing to health conditions and maintaining living standards for groups challenged by the Covid-19 virus.” 

Despite being launched with a 0% coupon, the bond attracted the NIB’s largest-ever order book for a euro benchmark, at €3.2bn. Price guidance began at mid-swaps plus 9 basis points (bps) area and was eventually set at plus 6bps.

Geographic distribution was concentrated in Europe and Asia, with 19% going to Benelux investors, 12% to Nordics, 6% to France, 4% to the UK and 32% to other Europe. Asia took 21% and the remaining 6% went to various other countries.

Central bank interest

Distribution by investor type told a more pointed story, with 58% going to central banks and official institutions. Banks took 24%, fund managers 12%, with 6% allocated to pension funds, insurance and corporates.

“A large number of central bank investors had been less active in recent months because yields were so low,” says Mr Stirling. “But these are very attractive products during times of uncertainty and volatility. With the added bonus of cheaper spreads and higher yields on offer, strong demand from the official sector helped to support deals.” Ultimately, this benefited spreads and stability as strong primary deals led to greater confidence for the secondary market.

Another feature of the NIB deal was the speed with which it was put together. Work on the transaction’s framework was completed in under two weeks, less than half the time it might normally have taken.

“NIB is a very experienced issuer in the sustainable bond market and turned the documents round very quickly,” Ms Gourc says.

Much the same could be said of BNP Paribas. French institutions generally have been pioneers in environmental, social and corporate governance (ESG) banking and investment, and BNP Paribas’ credentials in this area are impeccable.

Besides enabling it to structure the transaction in the shortest possible time, the bank’s experience also helped it to identify pockets of ESG demand. “We have dedicated people for ESG in structuring and in syndicate,” says Delphine Queniart, global head of sustainable finance and solutions, global markets at BNP Paribas.

EIB deal

In early April, BNP Paribas was mandated, alongside Bank of America, DZ Bank and JPMorgan, to lead-manage a €1bn eight-year no-grow sustainability awareness bond (SAB) for the European Investment Bank (EIB).

Launched in 2018 with an initial focus on water projects, the EIB’s SAB framework was extended to include health projects in late 2019. The development bank has since announced a plan to mobilise up to €40bn in response to Covid-19.

In an intraday transaction, books were opened with guidance of mid-swaps plus 10bps. Investor demand was electric and the offer was more than seven times oversubscribed, allowing pricing at a negative re-offer yield of -0.049% and a re-offer spread of mid-swaps plus 6bps.

“The EIB attracted €7.3bn of demand for a €1bn trade. That’s huge for a supranational, and it doesn’t happen very often,” says Benjamin de Forton, BNP Paribas director, DCM public sector origination. 

The bank will use the proceeds to finance urgent infrastructure improvements and equipment needs in the health sector.

Covid-19 hit Italy hard. In the first bond issue out of Italy since the crisis began, Italian development bank Cassa Depositi e Prestiti (CDP) launched a dual-tranche Covid-19 response bond in mid-April. Joint leads were BNP Paribas, Banca IMI, Morgan Stanley, MPS, Santander, Société Générale and UniCredit.

CDP promised to use the proceeds to help lending to SMEs, to support the healthcare, social and economic efforts of local authorities, and to finance healthcare facilities, medical equipment and technologies.

Books were opened with a spread to BTPs (Italian government bonds) of 45bps area for a three-year tranche and 50bps for a seven-year. With a combined book of €1.75bn, the tranches were sized at €500m each with spreads of 40bps and 45bps respectively.

French SMEs

Bpifrance Financement (BPI), the French public investment bank, came to market with its inaugural Covid-19 response bond towards the end of April, with BNP Paribas and NatWest Markets as structuring advisers.

The seven-year deal was launched with guidance of OATs (French government bonds) plus 42bps area. It generated the issuer’s largest-ever order book, at €3.4bn, and the transaction was duly sized at €1.5bn, with a 40bps spread, yielding 0.244% and with a 0.125% coupon.

“The BPI deal was the first Covid-19 response bond out of France. The proceeds will be used to help French SMEs overcome economic difficulties linked to the pandemic,” says Mr de Forton. 

Ms Queniart believes climate change and the environment should still be very much on the agenda for issuers and investors. “But Covid-19 has shed light on the other aspects of ESG investment: the social and governance elements. It’s notable that in the first quarter of 2020, SRI funds outperformed conventional funds,” she says.