Housing champion SBB on building social bond success

Every asset class has its breakthrough year, and 2020 was the year of social bonds. The category generated $164.2bn in 2020, according to data provider Refinitiv, 12 times more than the $13.8bn issued in 2019. But the market has been dominated by banks and government authorities, while corporates have been all but absent.

Some suggest the instrument’s fundamental purpose — to finance projects with positive social outcomes — is ill suited to companies. Last December, Sweden’s Samhällsbyggnadsbolaget i Norden (SBB) debunked this theory and issued a social bond attracting €2.2bn in orders.

Sustainable to its core

Of all the social bond issuers to date, few can match SBB’s social impact credentials. Founded five years ago, the social infrastructure firm owns and leases properties across the Nordics to elderly care homes, schools, pre-schools and apartments fitted for disabled tenants.

The Swedish rental market is regulated, but there is no social housing and, across the Nordic countries as a whole, there are few private investors in social infrastructure. “Funding usually comes from governments, whose budgets obviously fluctuate. However, a large private investment firm like ours can always continue to build and deliver these kind of important buildings,” says SBB’s chief executive Ilija Batljan.

SBB sold its debut green bond in early 2019, spurred on by its project to reduce carbon dioxide emissions from its properties. “Green building certifications are more directed towards newbuild offices, so these older apartments have largely been overlooked,” says Mr Batljan. “Historically, they consume a lot of energy and by refurbishing them we’ve been able to decrease emissions by between 20% and 50%.”

In 2020, SBB went a step further. It announced its ‘Sustainability Vision 2030’, which commits the firm to becoming climate neutral within the next decade, and transitioned its green bond framework into a broader sustainable finance framework that aligns with its core mission of supporting those most in need. “Obviously the climate element is very important. But if everyone has poor living conditions, no amount of green assets is going to help us,” says Mr Batljan. “We must have an inclusive view of sustainability.”

Win-win

After finalising the framework in November, with the help of Citi, SBB wanted to get a social bond out quickly. “We were keen to start as we had investments underway in Finnish elderly care homes and apartments for people with disabilities in Norway and Sweden. We thought these were a perfect match for this money,” explains Mr Batljan. SBB opted for a euro deal, given the international nature of the target projects and the fact long tenors are a hard sell in the Swedish krona market.

In addition to Citi, SBB brought in six other banks — BNP Paribas, DNB, Deutsche Bank, GSI, Morgan Stanley and Nordea — and then conducted a day of investor calls. On the morning of December 8, it launched a €500m eight-year social bond at mid-swaps plus 155 basis points, plus a €500m 5.25-year perpetual hybrid bond at 3.375%. In a matter of hours, both books attracted more than $2bn in orders before the social tranche was tightened to a coupon of 0.75% and the hybrid to 2.625%. The social bond was also upsized to €700m.

The pricing represented a negative new issue concession and both tranches continued to trade well in the aftermarket, leading Mr Batljan to describe the deal as “a win-win for the company, investors and society”. The hybrid bond also moves SBB closer towards its goal to improve its BBB- rating to BBB+ this year.

The €1.2bn deal is the largest Nordic real-estate financing in the capital markets to date, and the second social bond out of the Nordics. Perhaps the biggest milestone for SBB, though, is the strong demand from big buyers in key jurisdictions. Germany, Austria and Switzerland took 33% of the notes, the UK and Ireland took another 30% and France took 24%. “It showed that more large European investors are following the company and understanding what we are doing, which is very exciting to see,” says Mr Batljan.

Model corporate citizen

Familiarity among institutional investors is particularly important for a relatively frequent issuer like SBB. After relying predominantly on loans in its early years, the company has moved the bulk of its financing to the markets. Today, just 13% of its funding is from banks.

“That is very low for the Nordics,” says Mr Batljan. “Our long leases create safe, stable cashflows, so it made sense to move more of our funding to long-duration bonds.” SBB plans to increase its sustainable investments in the coming years, which makes its debut social bond among its most important capital markets outings.

Bond markets and buildings aside, SBB fulfils its social mission through other avenues. The firm works with various non-profits, such as Mentor and Läxhjälpen, and every summer runs a jobs programme for 100-plus teenagers from the low-income areas where it operates.

“This introduces them to the labour market and gives them an opportunity to connect with other adults, and to see that you as an individual can make your own money and future,” says Mr Batljan. “By financing these kind of initiatives, we are doing good for society, but also supporting our neighbourhoods.”