In a world full of information, the market for new bond issues is a source that allows us to take the pulse of the market and observe trends.
So let’s look at a recent example together:
Mid-June, two major electricity producers issued responsible bonds: France's EDF and Italy's Enel. The similarities end there.
EDF issued three green bonds with different maturities AND linked different projects to each maturity:
- a 7-year bond linked to extending the life of nuclear reactors;
- a 12-year bond for renewable energies;
- a 20-year bond linked to electricity distribution and the grid.
For the first time, an issuer is issuing several green bonds at once, linking them to clearly differentiated projects.
This clever approach was a success: 12.2 billion euros of interest, including a single order of 150 million euros from just one client.
The green bond linked to nuclear energy complies with the European taxonomy that classifies this type of energy as sustainable.
Not everyone agrees with this view, however. Some ethical investors are ruling it out on the grounds of :
- waste treatment;
- the potential proliferation of weapons;
- the risk of accidents linked to potential radiation.
EDF illustrates here the purpose of green bonds: Investors know what their money is being used for and can choose to lend in line with their values.
Enel, for its part, has chosen to stick to the bond format that the group inaugurated in 2019: sustainability linked bonds (SLBs).
There are no specific projects here: the money raised is used for "ordinary financing needs".
However, Enel is committed to reducing its Scope 1 emissions by 2026, and if the target is not met, the coupon on the bonds will be increased by 25 basis points.
This would not be the first time, and the Group has already had to increase SLB coupons, adding more than 80 million euros to its yearly interest expense.
That said,
- the format has come under fire, as among other things it facilitates the possibility of greenwashing, and
- volumes of new SLBs are in free fall.
However, the market gave Enel a warm welcome, with demand almost three times greater than supply. The premium offered on these dollar-denominated bonds is no doubt a factor in the market's appetite.
What can we learn from these examples?
First of all, investors are always very keen to buy new issues, whatever the format, as long as the premiums offered to existing bonds are attractive.
That EDF could have saved an average of 27 basis points per year, or 8 million euros per year or 116 million euros in total, by borrowing before the dissolution of the National Assembly.
As the group is 100% state-owned, its risk premium has diverged in sympathy with that of its owner.
Another reminder that, whatever their format, responsible bonds are financial investments subject to the same rules as conventional bonds.
