Taiwan's ASE brings Green bonds to Asia's corporate sector

Fri Jul 18, 2014 7:47am EDT

* Landmark deal comes amid strong growth in responsible investing

* Asian market for Green debt lags US and Europe

* Environmental criteria may be cumbersome for issuers

By Frances Yoon

HONG KONG, July 18 (IFR) - Advanced Semiconductor Engineering has sold the first Green bond from Asia's private sector in a deal that highlights the potential for sustainable investing in the region.

Green bond proponents say the Taiwanese chip packager's debut could persuade more Asian issuers to look beyond the cumbersome deal process and restrictions on the use of proceeds to cater to the growing number of investors who support environmentally focused corporations.

Yet bankers doubt that many Asian companies will do what it takes to qualify for a Green bond offering, particularly because it does not give them any obvious pricing advantages.

ASE's US$300m three-year bond priced late on Thursday to yield 125bp over US Treasuries after receiving more than US$2bn in orders, a sign of strong global demand. The final yield was in line with comparable bonds from the sector, showing that ASE didn't need to pay more to attract investors, but it didn't save money either.

"Issuers will have to go through that extra leg to qualify, and if it doesn't result in something bigger and tighter then some may think the extra effort is not worth it," said a banker familiar with the deal.

Green bonds are relatively new and, while guidelines for issuing environmentally designated securities are voluntary, companies are encouraged to use the proceeds for projects that support renewable energy, energy efficiency, sustainable transportation and other low-carbon projects.

"The driver is for companies who want to be more environmentally friendly, as opposed to having commercial advantages," the banker said.

ASE is the world's largest independent provider of semiconductor packaging and testing services, based on 2013 revenues. It is positioning itself as a low-carbon, climate-friendly company, giving it a strong incentive to issue a Green bond.

But the company has an additional motive in that it also needs to repair its environmental image. ASE was fined NT$110.1m (USD3.7m) for dumping waste water into the environment in October from the Kaohsiung City Environmental Protection Bureau in Taiwan, according to Joseph Su, manager at the ASE Group's investor relations department.

The plant's operations have since been suspended, although Su said the plant is currently operating at a full-scale test run.

GREEN POOLS

Supporters of Green bonds counter it will be hard to ignore the fact that more funds across Asia are signing up to be socially responsible investors. The pool may not be as large as in the US or Europe, but Asian investors bought about a fifth of a 1.5bn (US$2bn) Green bond sold by German development bank KfW last week, according to a banker who worked on that transaction.

"Any time you can increase your investor base and diversify your holders, that really improves liquidity," said Stephen Liberatore, a managing director and portfolio manager who oversees approximately US$5.7bn at TIAA-CREF. "Going forward, entities are going to be rewarded and will want people to know that they are trying to do things beneficial for the environment."

ASE is only the second issuer from Asia to sell a US dollar-denominated Green bond, after Export-Import Bank of Korea sold a US$500m five-year bond in February 2013.

The pace of Green bond issuance in Asia lags far behind the US and Europe where deals have boosted global Green bond issuance to US$18.3bn so far this year from US$11bn in 2013, according to a July report prepared by HSBC and the Climate Bond Initiative, a non-profit organisation that supports socially responsible funding.

The extra steps involved in designating a bond as Green have so far squelched Asian interest, however. One of these steps requires companies to receive approval for the use of proceeds from an independent environmental specialist, a process that may take a few months.

Kexim and ASE both waited that long for the Center for International Climate and Environmental Research, or CICERO, to approve their Green credentials, according to a Kexim official and a banker on the ASE deal.

Other steps require proceeds to be credited to a special account to assure investors the funds are being used strictly for the approved projects. Issuers are also advised to provide an update on how the money is spent.

The extra work may be tedious for Asian issuers, who already are able to price bonds at attractive levels amid views that global interest rates are expected to stay lower for longer. Both Kexim and KfW priced their Green bonds in line with their other outstanding debt.

GOING GREEN

Bankers both involved and not involved in ASE's offering expect it will take some time until more Green bonds from Asia can materialise.

But lower-rated issuers may be able to get better pricing for their deals if they can present a strong case for their Green projects.

"They might be able to attract a broader investor base that is focused not just on fundamentals but also the nature of the company and the type of work it's doing," according to TIAA-CREF's Liberatore, who bought into Kexim's earlier Green issue.

Still, some investors, like TIAA-CREF, may be prevented from buying bonds from speculative borrowers.

"Our social criteria cause us to focus only on those entities that are leaders in environmental, social and governance performance," Liberatore said.

Another banker not involved in ASE's deal added that unrated borrowers with clear green projects could try to borrow funds through private placements.

HSBC expects global Green bond volume to reach as much as US$60bn this year and more than US$100bn in 2015.

"The pipeline is strong and we constantly see new and existing issuers being attracted to the benefits of the market," according to Ulrik Ross, global head of public sector and sustainable financing at HSBC.

CHINA BOOST

Asian Green bond issuance in particular is expected to get a boost from China's initiatives to clean up its environment. The State Council, China's cabinet, announced in August 2013 that it plans to grow a corporate Green bond market in China. The government had earlier announced plans to reduce pollution under its 12th Five-Year Plan.

"You would expect a fair amount of response coming from banks, especially for the purpose of clean water, energy and in public transport," said Sean Kidney, CEO of the Climate Bond Initiative.

"We are expecting issuance from three parties in the first instance - the development banks like the Industrial Bank of China and China Development Bank, secondly, by some state-owned enterprises and then at the provincial city levels," Kidney said. (Frances Yoon)