(Bloomberg) – ESG financiers are in a fighting mood as the $4 trillion market for socially responsible credit remains open as the broader primary market closes on recession risk.
Although volumes have fallen, sales of new green, social, sustainable and sustainability-related bonds are increasing as a proportion of overall issuance. According to data compiled by Bloomberg, they accounted for 9.44% of the volume of more than $1 trillion in corporate bonds issued in US dollars this year through July 15. That compares to about 8.8% of the $2.5 trillion issued throughout 2021.
As the Federal Reserve’s tightening campaign raises the odds of a recession and boosts global credit volatility, debt market practitioners are seeing a sustained boom in all environmental, social and governance areas.
“The U.S. market is growing and you’re seeing more and more pricing advantages for ESG instruments, especially green bonds,” said Trisha Taneja, global head of ESG for origination and bonding. consultancy at Deutsche Bank AG, which ranks fifth in the world. – the largest underwriter of green bonds.
On the current trajectory, underwriters see the possibility of a busy second half for the show.
“The drop in ESG emissions was not driven by a lack of will to issue, but rather by the general market downturn,” wrote Barclays Plc strategist Charlotte Edwards in a July 8 note, noting the higher percentage of the total supply of companies entering the market. with an ESG label this year.
At the same time, the U.S. Securities and Exchange Commission’s in-depth review of how domestic companies and fund managers are managing climate change risks has prompted companies to highlight and meet their sustainability goals, according to major underwriters Bank of America Corp. and Deutsche.
“We continue to have a very strong and diverse pipeline in terms of structures, as well as sectors represented,” said Steven Nichols, head of ESG capital markets for the Americas at BofA Securities, the largest underwriter of sustainability bonds. in 2022. “This reflects a dramatic increase in attention to the ESG theme among U.S. investors, helping to attract more attention from U.S. issuers.”
PepsiCo Inc. is the latest U.S. firm to sell ESG-themed bonds, which tapped the investment-grade bond market on Wednesday with a $2.5 billion three-part deal that included a $1.25 billion green tranche of dollars. Orders for the overall deal peaked at $16 billion, allowing the issuer to pay much lower new issue concessions of between 5 and 10 basis points, according to Bloomberg strategist Brian Smith. The soda giant tapped into the green bond market for the first time in 2019 when it raised $1 billion in senior unsecured green securities.
And the show is on track to continue to rise at the start of the second half of 2022, according to BofA. Likely issuers include sovereigns expected to reach deals later this year or early 2023, according to Deutsche, as well as companies in sectors more exposed to climate risk, such as natural resources, industrials, metals and mines.
The high yield market can also be a source of increased ESG emissions, particularly in Europe. Right now, the continent is bearing the brunt of the war in Ukraine, with issuers focusing on immediate liquidity and funding needs rather than green and social funding, Deutsche’s Taneja said. “It’s a pipeline that’s building but the market just hasn’t reopened, so really it’s a question of when is the right time for them to come to market,” she said. .
Still, bonds linked to environmental, social and governance projects accounted for 19.3% of more than $697 billion of all euro-denominated corporate bonds issued this year, compared with around 24% of the $1.2 trillion. dollars issued last year.
Borrowers looking to save on funding costs as central banks raise rates to curb inflation are more likely to choose green bonds over sustainability-linked offerings, as the latter penalizes issuers if they fail to meet ESG standards, Barclays’ Edwards said.
As for new issuers, they’re likely to be more strategic about when they sell sustainable debt and what type of debt they want to sell, said Nneka Chike-Obi, head of APAC ESG research for Sustainable Fitch. But companies with ongoing sustainability bond programs will likely continue to issue debt this year, she added.
“Macro conditions are really going to be the biggest factor,” Chike-Obi said. “June was quite active compared to the first five months of the year, so things could pick up.”
Elsewhere in credit markets:
No companies were looking to sell investment-grade U.S. bonds on Friday, according to an informal survey of debt underwriters. Early estimates for next week look weak as markets are skewed by shifting expectations of monetary tightening from the Federal Reserve and concerns over global economic growth.
- Michael Vranos, managing director and mortgage expert at Ellington Management Group, said investors should be selective about debt exposed to consumers and review structured credit opportunities, including secured loan obligations.
- High-quality bond sales were on track to end the week below union estimates for the fourth time in the past five weeks
- U.S. junk bonds headed for a weekly loss, hit by Wednesday’s report that inflation jumped to another four-decade high. The loss since the start of the week was 0.28%, fueled by a pullback on Thursday that pushed yields to nearly 8.68%
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Holders of the riskiest bank debt could see their investment assumptions scrambled over the next four months, with some lenders having to breach a bond market convention and ignore their call options due to the exorbitant cost of replacing old notes. .
- Volatility triggered by global recession fears is closing the door on debt deals in what could be the slowest July on record for European corporate issuance. Sales of non-financial companies in the region reached just 1.97 billion euros ($1.98 billion) this month, well below historic levels in July
- PepsiCo was the only issuer in the market on Friday, after selling it in the US with a two-tranche offer of £600million
- The last issuer to tap the sterling market was McDonald’s at the end of May
Offshore bond bids in Asia fell again this week as borrowing costs could rise more sharply than expected as central banks around the world step up efforts to fight inflation.
- Primary issuance of U.S. banknotes in the region fell to around $900 million from $2.5 billion last week, according to data compiled by Bloomberg.
- Guangzhou R&F Properties Co. has secured bondholder approval to extend its offshore bonds, allowing the Chinese homebuilder and luxury hotel owner to further push back debt payments
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