July 11, 2016 / 3:06 AM / 3 years ago

Victoria adds to Aussie bond market's green shoots

* First state government follows banks and SSAs into Green format

By John Weavers

SYDNEY, July 11 (IFR) - Australia’s underdeveloped Green bond market is about to grow as the Treasury Corporation of Victoria lays the groundwork for the first such issuance from a state government.

Triple A rated TCV holds investor meetings this week ahead of a potential offering via NAB for only the seventh such transaction Down Under.

With total Green offerings of just A$2.35 billion ($1.76 billion) from six credits, the Australian dollar market accounts for just 1.5 percent of all outstanding green bonds, according to the Climate Bonds Initiative’s fifth annual state of the market report.

However, recent developments point to growing interest from Australian investors.

In April, consumer-finance specialist FlexiGroup printed Australia’s first Green securitisation to show that some investors were willing to pay a premium for exposure to environmentally responsible assets.

Flexigroup’s ABS included A$50 million of A2G notes backed against loans for residential rooftop solar power systems. This tranche priced 5bp inside an identical portion secured against non-green assets - something few other issues have managed globally.

Westpac could not repeat this feat a month later when it became the fifth issuer of Green senior unsecured Australian dollar bonds and the third major bank to do so.

Westpac’s A$500 million 3.1 percent fixed-rate note, the proceeds of which fund renewable energy and low-carbon commercial property in Australia, priced in line with its simultaneous A$1.8 billion floating-rate notes.

Fellow Aussie majors NAB and ANZ had previously priced Green issues in line with conventional levels, with their respective A$300 million seven-year and A$600 million five-year notes in December 2014 and May 2015.

The World Bank issued the first Green Kangaroo in April 2014 with a A$300 million five-year bond and German agency KfW followed 11 months later with a A$600 million 5.25-year note.

No corporate issuer has yet visited Australia’s Green market, even though the format is a good fit for companies with natural Green assets.

Local property group Stockland went offshore to sell a 300 million euros ($331 million) seven-year Green Eurobond in October 2014, while Energy Infrastructure Trust-owned Hallett Hill No 2, a wind farm in South Australia, raised $200 million from a US private placement.

A “good cause” premium, whereby Green investors accept lower yields over conventional bonds, could trigger a run of senior unsecured supply from issuers that might otherwise baulk at the higher documentation costs. Choice assets A Sydney fund manager, who will be attending the investor meetings, is keen to see what assets TCV is ring-fencing for the sale.

He expects Victoria’s Green bond to come flat to its standard curve as have all previous bank and SSA senior unsecured notes, although he does see some potential for tighter pricing.

“In theory, Green bonds should be viewed as senior if their ring-fenced assets are seen holding up better than the issuer’s overall asset pool in times of trouble,” he said.

The continuing growth in ethical funds should also increase price tension and may lead to tighter outcomes for Green issues going forward.

The Responsible Investment Benchmark Report 2016, which is due to be published on July 13, is likely to confirm the upward trend. Last year’s report showed socially responsible investments in Australia in 2014 grew 24 percent year on year to A$31.6 billion, or 2.49 percent of total assets under management, versus and increase of 2.39 percent the previous year. This followed 50 percent growth in 2013.

The CBI estimates climate-aligned bonds outstanding globally total $694 billion, comprising $576 billion of unlabelled climate-aligned notes (which finance climate solutions, but do not carry a label) alongside $118 billion of labelled Green paper.

The renminbi is the dominant currency with a 35 percent global share, the US dollar is next at 24 percent and the euro third at 16 percent. Sterling, the Canadian dollar, Russian rouble, Indian rupee, Korean won, Swiss franc and Swedish kroner make up the rest of the top ten in that order. (Reporting By John Weavers; editing by Vincent Baby and Daniel Stanton)

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