TwentyFour Asset Management

Green AT1 Raises More Questions Than Answers

TwentyFour Blog

Today BBVA announced it would be issuing the first ever green Additional Tier 1 (AT1) bond, a perpetual non-call 5.5-year with initial price thoughts at 6.5%, and immediately sparked a spirited debate among the TwentyFour team over how green bank capital can be.

The premise of the deal is to assist the Spanish bank’s commitment to providing €100bn in sustainable financing by 2025. However, the documentation makes it clear that this new issue might be used to refinance another AT1 BBVA has outstanding. For us, this causes some confusion. Will this bond be used as capital against lending for sustainable projects, or will it be used to buy back an existing AT1?

BBVA does already have €2.9bn of eligible green assets in its portfolios, so technically it could do both. However, the key question from an ESG point of view is whether this will improve the sustainability of the company, and on this we will have to reserve judgement for now; the proceeds of this deal could lead BBVA to increase its ESG-friendly lending, but equally it could have no impact whatsoever.

Green bond issuance has been gathering pace as more investors focus on ESG issues and the sustainability of companies, with around $271bn of such bonds issued in 2019. The key concerns for this relatively new sector have been tracking the use of proceeds and the subsequent reporting. While we think this will be resolved at some point, perhaps with a more standardised framework put in place, currently there is nothing to regulate the proceeds of ‘green’ deals going to ‘green’ projects, and BBVA looks to have taken note of some of these concerns.

Firstly, the bank intends “to maintain a buffer of projects above the proceeds” for all its green (or social or sustainable) bonds to ensure it is in compliance with the “Use of Proceeds”. Secondly, BBVA will issue an annual bond report prepared by its SDGs (Sustainable Development Goals) Bond Committee, which we hope will detail each green investment the bond issuance has facilitated. Again, we will have to wait to see exactly how the bank will handle this, and if there is a clear audit trail for use of proceeds.

The green bond market is relatively young and still in transition, and with this inaugural issuance of a green capital instrument adding another dimension to the sector, we are keen to see what both traditional bank capital investors and more ESG-focused buyers make of the innovation. We expect the deal will gather a lot of interest from the investment community, which will likely lead other banks to follow suit. We will have wait to and see how the market develops, and if Green AT1 deals can indeed lead banks to increase their sustainable lending.

Ultimately, BBVA is a bank that we have long liked as a credit in general, and given the initial pricing thoughts many investors may conclude that on a relative value basis the new bond looks an attractive one, with or without the Green label.