Last week, Bank of China (BOC) achieved a world first for sustainable issuance, becoming the inaugural financial institution to issue a transition bond for application to activities in the steel sector.
The bank’s Luxembourg branch issued four tranches of euro-denominated notes amounting to EUR329.60 million ($348.88 million), which will be put to work across steel projects in China’s central Hebei province.
“This issuance reflects Bank of China’s efforts to integrate sustainability considerations into their banking activities in a holistic manner,” Chaoni Huang, head of Sustainable Capital Markets for Asia Pacific at BNP Paribas, told FinanceAsia.
BNP Paribas served on the deal as a joint structuring advisor alongside Credit Agricole CIB and BOC; and as a joint lead manager (JLM) and joint bookrunner (JBR).
Huang described BOC’s decision to explore transition financing as a natural continuation of the decarbonisation and fundraising strategy it initiated in 2016, following its success raising approximately $16 billion in US dollar equivalent across green bonds; over $640 in social notes; $1.2 billion in sustainability bonds and $779 million in transition bonds across its 13 overseas branches.
She attributed the team’s decision to issue notes in euro, as offering diversification as well as access to a sophisticated, ESG-savvy European investor base.
Winston Herrera, co-head of Syndicate for Asia ex-Japan at BNP Paribas, told FA that the transition bonds priced at EUR99.654 each, with a 4.125% reoffer yield, achieving a margin of mid-swaps plus 60 basis points (MS+60bp).
Maturing in October 2026, the notes were 1.8x oversubscribed, with Asian investors accounting for 77% of the issuance, and remaining interest coming from those based in Europe, the middle east and Africa (Emea). The majority of uptake came from banks and financial institutions (90%), with additional interest from supranationals, sovereigns and agencies (SSAs, 7%) and insurers and private banks (3%), he added.
Stringent preparation
“What made the deal stand out was its level of stringency and robustness in terms of preparation,” Huang told FA.
She commended BOC’s hard work to issue a clear, Transition Bonds Management Statement in reference to the International Capital Markets Association (ICMA) Climate Transition Finance Handbook; the bank’s efforts to align its endeavours to the four pillars of ICMA’s Green Bond Principles (2021) and ICMA’s Sustainability Bond Guidelines (2021); as well as alignment with various additional technical thresholds, such as the Climate Bond Sectors Criteria, and the EU and Common Ground taxonomies.
“There has been a misconception around transition finance as being approximate to green washing, but we see more awareness being raised.”
She emphasised that significant effort is required to educate investors around the importance of participating in transition finance and its role in delivering true, climate positive impact across hard-to-abate sectors.
China’s steel sector has faced challenges in recent years, including weaker than anticipated demand from the property sector that was further compounded by pandemic restrictions, as well as moves by the US and EU to shield industries from cheap competition.
Huang cited the BOC team’s efforts to build extra safeguards into its landmark issuance, including the “avoidance of carbon lock-in” to encourage the adoption of the latest transitional technology across steel projects and the commitment to “do no significant harm”.
In spite of the challenging timing amid rising market volatility as a result of conflict in the middle east, the market response from investors was positive and reflected optimistic sentiment towards China credit and ESG, she added.
Green horizon
Discussing the outlook for sustainability issuance across the remainder of the year, Huang said that the BNP Paribas team hopes to close 2023 on a high note: “It’s hard to predict market windows without a crystal ball, but we continue to be focussed on the mandates that we have and will remain consistent.”
“The sustainability sector is showing resilience. If we look at activity in the first half of the year, we can see that globally sustainable bonds have achieved an issuance volume of $470 billion, which is 15% higher than the same time last year… Among labelled bonds, green bonds are the consistent outperformer, accounting for 70% of labelled issuance in Asia and globally.”
Her team remains bullish on activity related to electric vehicles (EV) and sees emerging opportunities in biodiversity.
“Policy clarification and capacity building are two areas that will help scale appetite for transition finance.”
The full dealmaking team involved the following banks as JLMs and JBRs: Bank of China, BNP Paribas, Agricultural Bank of China, Bank of Communications, Barclays, China Construction Bank, China Minsheng Banking Corp., Ltd., China Securities International, CITIC Securities, CMB Wing Lung Bank Limited, CNCB Capital, Crédit Agricole CIB, HSBC, ICBC (Europe) S.A., OCBC and UBS.
Bank of China and Crédit Agricole were unable to offer comment prior to publication.
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