Green Bond Pricing in thePrimary Market: Q4 2016 snapshot

Initial findings indicate that there is over-subscription and tighter pricing of USD and EUR
denominated green bonds in the primary market.

This study presents an initial analysis of asample of green bonds issued in Q4 2016 toexplore how they are received in the primarymarket. It is the first report in a series ofreports that we aim to produce on this topic
quarterly. We included green bonds:-15-20••Bank of China

Southern Power ‘19

Iberdrola

MTR

EDF

Southern Power ‘21

PolandBAMLBNP

RabobankTennet

Société Générale

KFW

Swaps
Treasuries

with an issue size > USD200mn

Findings at issuance

2. Oversubscription is common

denominated in EUR or USD, and

1. Final pricing is consistently lower thanissued from 1 Oct - 31 Dec 2016.

initial price talkOrder books are compiled by selling managers
based on interest from investors. We foundinformation for 11 of the 15 bonds in oursample. The order books were oversubscribedfor all of them.

Quasi Government

222

10

Rabobank

63

Iberdrola5

Rabobank demand was said to have reached 4times the final book size. Few days prior to the2016 US election, Bank of America launcheda green bond that was oversubscribed by 3x.

BAML

Corporate

3 bonds were > 2.5 x oversubscribed,

Southern Power ‘21

EUR

4 bonds were 1.5x - 2.5x oversubscribed,

MTR

USD

4 bonds were up to 1.5x oversubscribed,

Southern Power ‘19

Asset classes•••

4Poland

Asset classes

Bonds are always oversubscribed to somedegree, so we have also calculated how manytimes each bond was covered, and found:

Oversubscription is the norm

Société Générale

Our belief is that pricing is better than
expected primarily because there is unmet
demand for green debt. The demand is driven
largely by investors with a green mandate but
also by regular investors interested in green
bonds as an easy way to gain exposure to thegreen theme.

Tennet

The majority of green bonds and all thoseincluded in this study are pari passu withother debt of the same rank, so we would
not expect them to be more expensive thanvanilla bonds. A green premium is therefore
somewhat of an anomaly.

KFW

Why are we seeing agreenium?

Before a bond is issued, managers
estimate the price at which they will
be able to sell the bond based on theirassessment of market conditions. Pricetalk information was available for all bonds
in our sample, and we know where all
the bonds were priced. EIB and MuniFin(both Quasi Governments) priced exactly
as expected. The other 13 bonds in oursample achieved better pricing than
anticipated, 6 of them by between 20%
and 25%. Rabobank achieved an improvementof over 30% with its first green bond (5-year,EUR).

EIB

A total of 19 bonds fitted these parametersof which 15 were selected on the basis ofdata availability. Bonds cover a variety ofsectors and credit ratings.

Number of times oversubscribed•••-10

Basis points

Since the first corporate green bond wasissued in 2013, there have been annecdotes
of green bonds pricing tighter than similar
vanilla bonds.

Muni FinEIB

USD and EUR bonds
Final pricing is consistently tighter than initial price talkare pricing better than0expectations
Final pricing is tighter thanprice talk-5
80% of bonds demonstrated
tighter spreads after 7 days

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THE PRIMARY MARKET

28 days post issuancespreads tightened

7 days post issuancespreads tightened

Findings post issuance
1. Pricing tightens after 7 days
7 days post announcement date, 12 out of 15
bonds in our sample were tighter. The spreadchange varied from +0.87bps for Tennet, to-14.22bps for Poland. The Polish bond was thefirst green sovereign and was extremely wellreceived by the market.

> -10bps+ 0bps>-50bps+ 0 bps-5 to-10bps-15 to-50bps

2. Pricing tightens after 28 days

Source: Bloomberg

After 7 days, most green bonds tightened relative to the index

-20%
-30%

Southern Power ‘21

Southern Power ‘19

Bank of China

Iberdrola
PolandBNP

Iberdrola

-30%

BAML

EDF

-20%

Rabobank

-10%

Bond
BenchmarkEIB

0Société Générale

Spread10%

MTR

Tennet20%

The analysis above suggests that EUR and
USD green bonds are pricing tighter than
expectations in the primary market.

Muni Fin30%

As the market grows and evolves, we will beable to gather additional evidence which mayor may not support our initial findings. We
will be publishing more research on this topic
during 2017.

S. Power ‘21

Source: Bloomberg and Thomson Reuters

After 28 days, most green bond tightened relative to the index

The context

However, the time period analysed (Q4 16)
was also a strong period for the bond market
and a time of global political and financial
market uncertainty. This and the small data
set available means that it is difficult toidentify where a true pricing beneft is present.

S. Power ‘19

BAMLMTR

Muni Fin

TennetPolandEIB-10%

7 days post announcement: 14 out of 15 bonds
in our sample had moved more favourably
than their index: tightening more aggressively,widening by a smaller magnitude, or going in adifferent direction.
28 days post announcement: 11 out of15 bonds in our sample had moved morefavourably than their corresponding index.
Overall, the individual bonds showed better
performance on a % change basis than theirpair indices 7 and 28 days post announcement.

0Bank of China

Spread

10%

EDF

20%

BenchmarkRabobank

30%

Société Générale

Bond

We compared the spread of each bond to ‘themarket’ by matching each bond with an iBoxx
vanilla bond benchmark. We have chosen
standard iBoxx bond indices, partitioned by:currency, asset class, credit rating, and time
to maturity. While we acknowledge that thisis not a precise match, we believe indices give
decent representation of market behaviour.

BNP

corresponding index

Source: Bloomberg

KFW

3. Most bonds performed better than their

0 to-15bps

0 to-5bps

KFW

28 days post announcement date, 12 out of15 bonds were tighter. 9 bonds had tightened
between 0 to 15 bps. The largest difference
was the BAML bond which tightened by morethan 50 basis points. Meanwhile, the MTRbond was 5bps wider.

-40%
-50%

www.climatebonds.net

Source: Bloomberg and Thomson Reuters

Research supported by:

Want to know more?
Contact caroline@climatebonds.net
Climate Bonds Initiative © March 2017.
Disclaimer: The information contained in this communication does not constitute investment advice and the Climate Bonds Initiative is not an investment adviser. Links to external websites are for information purposes only. The Climate Bonds Initiative accepts noresponsibility for content on external websites. The Climate Bonds Initiative is not advising on the merits or otherwise of any investment. A decision to invest in anything is solely yours. The Climate Bonds Initiative accepts no liability of any kind for investments any individualor organization makes, nor for investments made by third parties on behalf of an individual or organization.

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