The success of Bank of China's green covered bond issue on the London Stock Exchange has given the bank confidence to follow its commitment to support green industries and build up its strength in this asset class, as Joanne Hart reports.
On November 11, 2016 a $500m green covered bond, issued by the Bank of China, was listed on the London Stock Exchange. The transaction marked a new development in both the green finance sector and the Chinese securities market more broadly. The bond was the first green covered note to come out of China and the first time that international investors were able to access domestic Chinese green bonds, albeit through the Bank of China (BOC).
“China’s domestic green bond market has grown rapidly [in 2016] and is now one of the largest green bond markets in the world,” says Luo Ying, deputy general manager of BOC’s team. “However, international investors lack effective investment channels to invest in China’s domestic bonds and their knowledge of China’s green bond market is quite limited. The issuance allows offshore investors to access China’s green credits as a new asset class and helps to educate investors about China’s green bond markets and green industries.”
A green determination
The bank began to consider a green bond in mid-2016 and work on the covered bond format started in earnest in September, around the time of the G20 summit in China. However, BOC had already been involved in several meetings of the Green Finance Study Group, a joint UK-China initiative established at the beginning of 2016. “We were determined to build up our strength in green finance and contribute to the integration of onshore and offshore green bond markets,” says Ms Ying.
As the transaction’s name indicates, the structure combined the features of green and covered bonds. “As a green bond, the issuance followed current green bond principles, with all the net proceeds allocated to BOC’s new or existing green loan projects. As a covered bond, the issuance was secured with a pledge against a BOC-owned portfolio of climate-aligned bonds traded in China’s interbank bond market,” adds Ms Ying.
“The bond also bears ‘double greenness’ with both the collateral and the use of the proceeds complying with international and domestic green bond standards. As such, the transaction demonstrates our commitment to supporting China’s green industries and driving the development of the green bond market,” she says.
The deal was also the first time a Chinese issuer has used the covered format. “The covered format will help to expand the number of cost-saving funding channels for Chinese financial institutions. And we hope it will drive financial innovation in the domestic bond market too,” says Ms Ying.
Given that this was a first for China, there were several challenges to overcome, not least on the legal and regulatory fronts. “Due to the lack of legislation for covered bonds and the cross-border nature of this transaction, we could not just adopt the conventional covered bond structure so we needed to investigate alternative structures. And there was no specific regulation regarding covered bond issuance, so we had to consult with regulators and ask for their approval on a case-by-case basis,” adds Ms Ying.
Legal framework needed
The broader legal framework in China created further issues. “China’s laws and regulations lack clear definition and operational procedures for bank restructurings and takeovers, as well as resolution and winding up exercises. The payment hierarchy of various creditors are subject to further clarification. Legal uncertainty turned out to be one of the biggest challenges in this deal. Financial innovation will be much easier in a clear-cut legal framework,” says Ms Ying.
Ultimately, legal and regulatory issues were addressed and, encouragingly for BOC, credit rating agency Moody’s gave the bond a Aaa3 rating, a one-notch uplift for the bank and equivalent to China’s own sovereign rating.
The bond was launched on November 3, just five days before the US presidential elections. Markets were subdued at the time but BOC decided to press ahead. The bank had held roadshows in Hong Kong and Singapore, a number of international investor conference calls had been arranged and the general response was encouraging, with several cornerstone orders already in place.
Timing the deal
There was a timing issue too, however, as BOC wanted to complete the deal to coincide with the 8th China-Britain Economic and Financial Dialogue, which closed on November 10.
On November 3 at 10am, books opened with initial price guidance of 115 basis points (bps) over Treasuries. By the end of the day, orders amounted to $1.25bn and final price guidance was revised down to between 95bps and 100bps over Treasuries. The bond was finally priced at a spread of 95bps, 5bps inside BOC’s unsecured senior curve, and $135m of paper went to European investors, an indication of European interest in this sector of the market.
BOC’s joint global coordinators and bookrunners were BOC itself, Citi and HSBC, backed by a broader bookrunning team comprising Barclays, China Construction Bank, Crédit Agricole, Merrill Lynch, Société Générale and Standard Chartered.
“The lead managers have worked with us on many landmark deals and demonstrate and expertise in the field of green bond/structured bond underwriting. We appreciate their efforts in making this deal successful,” says Ms Ying.
Looking ahead, BOC has been emboldened by this exercise. “The greatest lesson that we have learned is that innovation pays off. And we are now looking forward to more innovative ventures to add value to our bank and the whole market,” says Ms Ying.
