Social-bond surge reaches Australian shores

The deal contributes to a surge in SSA Kangaroo social-bond issuance in 2021, following trades from International Finance Corporation, NRW.BANK and a gender bond from Asian Development Bank. IDB Invest, an entity related to Inter-American Development Bank, was considering a social-bond deal as of 10 June. Total SSA GSS issuance has already hit A$5 billion in 2021, and social-bond issuance is just ahead of green as the dominant format (see chart 1).

National Housing Finance and Investment Corporation remains the only local Australian dollar issuer of social bonds. It priced a dual-tranche deal the day after AfDB to take its total social bonds outstanding past A$1.5 billion.

Australian dollars is the fifth currency in which AfDB has issued social bonds since it established the programme in 2017, following deals in euros, US dollars, Norwegian krone and Swedish krone.

*Social includes ADB’s gender bond.
Source: KangaNews 10 June 2021

AfDB’s Abidjan-based chief treasury officer, Keith Werner, tells KangaNews a combination of a constructive market backdrop and a growing bid for GSS product in Australian dollars precipitated the opportunity for a benchmark mid-curve return.

“The appetite for GSS issuance in the Kangaroo market has been hard to ignore. We have seen other transactions provide a strong tailwind, not just for larger orders but incremental bids as well,” Werner says.

Daniel Wilson, vice president, DCM Asia Pacific at RBCCM in Sydney, says the growing bid for social and other ESG transactions among Australian investors has been a notable feature of demand for SSAs in recent months, with investors increasingly eager to understand the social purpose of the projects they are funding.

AfDB’s social bonds have use of proceeds allocated to projects that alleviate or mitigate social issues such as improving access to electricity, water and sanitation, and improving livelihoods through flood-risk reduction and access to clean transportation and employment generation.

The wave of social-bond issuance in Australian dollars has come almost a year after it emerged elsewhere in global markets. The pandemic sparked greater awareness of social outcomes in global market participants and enabled SSA borrowers, which are naturally suited to social-bond issuance, to print record volume in the format.

AfDB itself printed a US$3.1 billion “fight COVID-19” social bond in 2020, at the time the largest-ever in the format.

However, Australian dollar market dynamics were not conducive to SSA issuance in any format during 2020 so the expansion in social-bond issuance did not spread to the Kangaroo market. However with programmes and global price points established, and Australian dollar conditions now more workable for SSAs, consistent issuance has emerged.

Oliver Holt, Singapore-based head of debt syndicate, Asia ex Japan at Nomura, says AfDB timed its transaction well as market conditions were supportive and local appetite for social bonds building after the recent transactions. Kangaroo SSA pricing has become more compelling for investors on a relative-value basis, according to Holt. He says Nomura has received feedback that pricing in the sector is being viewed positively compared with Australian bank paper.

Wilson says interest in the format is such that it presents opportunities for more names, like AfDB, that have not been active in Kangaroo format for some time.

Holt tells KangaNews the AfDB transaction, as well as other recent deals from Asian Infrastructure Investment Bank and NRW.BANK, benefited from a slightly different execution method to what has been typical in SSA Kangaroo deals.

Instead of launching with a minimum volume and specific price guidance, the deals have been marketed with either benchmark size or a pricing range. Holt says this provides more flexibility and allows for more investors to express interest.

This, combined with the compelling social-bond angle and AfDB’s long absence in benchmark size, induced strong demand from local and regional investors, Holt says.

KangaNews data show that AfDB had A$1.75 billion of bonds mature between its 2015 benchmark deal and its most recent, with most of its supply coming from targeted, long-dated taps. The social element of the deal may have helped bring pricing in from levels influenced by a lack of supply.

Wilson explains: “The issuer had not printed a benchmark deal in the Australian dollar market since 2015 and as a result its Kangaroo bonds were trading slightly wider than the relative value to AfDB’s peer group in the US dollar market. We thought a benchmark mid-curve transaction would recalibrate this, and the social element added to demand to aid pricing.”

Werner tells KangaNews the deal priced roughly in line with AfDB’s US dollar curve, aided by a steepened credit curve in US dollars.

More than 30 investors participated in the deal with total bids of more than A$775 million leading to an upsize. A strong cohort of Australian investors participated in the deal, while by investor type fund managers were the major participants (see charts 2 and 3). Werner says 38 per cent of investors in the deal had a socially responsible investment approach.

Source: African Development Bank 10 June 2021

Source: African Development Bank 10 June 2021

AfDB intends to issue more social bonds in Australian dollars. “There is a virtuous circle here. The transaction has reaffirmed and increased our investor base in Australia and offshore while giving access to scarce ESG investments. Hopefully others can follow and we have the opportunity to return,” Werner comments.