Hyundai Capital took the Asian green bond market up another gear on Monday night with the completion of a $500 million deal tied to green auto-finance loans for Hyundai Motor and Kia Motors.
The five-year offering marks a new stage of development for the international dollar bond market in Asia, which has so far been dominated by supranationals and quasi-government agencies.
It also comes at a time when issuance has started to accelerate in China's domestic bond market following the release of issuer guidelines by the government in late December.
Hyundai goes green
Hyundai Capital amassed an order book of $1.2 billion for the 144a deal according to syndicate bankers, similar to the $1.1 billion level the Export-Import Bank Korea (Kexim) attracted for its own $400 million five-year SEC-registered deal at the beginning of February.
However, whereas only 17% of Kexim's paper was placed in the US, bankers said Hyundai Capital's percentage was much higher, although Asia still led demand overall. US investors have been noticeably absent from recent Asian deals but syndicate bankers said their re-appearance was one of the standout aspects of Hyundai's trade.
In total 98 accounts participated, with allocations split 47% Asia, 34% US and 19% Europe. By investor type, 45% went to fund managers, 18% to banks, 15% to corporates, 9% to pensions/insurance funds and 13% to private banks and other. Very little paper is believed to have gone to dedicated green funds.
When Hyundai Capital last came to market in March 2015, 43% of its $400 million 2.625% September 2020 deal was placed into the US. This was the main pricing comparable for the new deal, which was initially marketed at 165bp over Treasuries.
Final pricing was fixed at 99.815% on a coupon of 2.875% and yield of 2.915% or 150bp over Treasuries.
The September 2020 deal was trading on a G-spread of 146bp over at the time of pricing but had widened out about 5bp over the course of the day.
Bankers said the curve through to March 2016 was worth about 5bp. This means Hyundai Capital has offered a 4bp new issue premium, which could almost be considered generous in comparison to most Korean borrowers' aggressive pricing demands.
Hyundai Capital's deal came into a market where 10-year Treasuries are starting to head back towards the 2% mark again. Bankers said this shift in sentiment had little direct impact on the deal but is now providing a more stable backdrop for issuers in the pipeline.
"The Treasury market was a little soft at the US open today but Friday was very stable and I think this comforted all the issuers who hit the market on Monday," said one banker. "There's a feeling Treasuries and commodities are finally stabilising after all the recent volatility."
In its offering prospectus, the company said funds will be used to provide new car financing for green models manufactured by Hyundai Motor and Kia Motors.
Proceeds will be held in a segregated account but the circular makes no mention whether the company has sought a second opinion, which would certify its use of proceeds in line with Green Bond Principles - guidelines drawn up by industry players in 2014.
Sean Kidney, CEO and co-founder of the London-based Climate Bond Initiative, told FinanceAsia that transactions are only truly green if they include a second opinion. Commenting on Hyundai's deal he said: "it's really good to see a blue chip go green. Asia needs more issuers like this."
Indeed, Hyundai is only the second global car company to issue bonds after Toyota Motor Corp, which has raised $3.25 billion through two deals in 2013 and 2015.
In its online roadshow, Hyundai Capital said the group wants to be the number two green car player by 2020 and aims to improve the average fuel economy of its vehicles by 20% then.
Any uptick in Hyundai Motor's fortunes, in particular, will be tied to positive news coming out of the emerging markets and any signs of weaknesses in the US dollar's recent strength. According to a recent UBS research report, 55% of its production base is located in emerging market countries and its sales account for 52%.
Overall sales figures for February, for example, show a 4% decline year-on-year thanks to a collapse in China sales (down 20%), followed by Russia (down 21%), the Middle East (14%) and Brazil (14%).
On the other hand, both Hyundai Motor and Kia Motors are doing well in Europe where Hyundai is up 9% year-on-year in February and Kia is up 19%. In the US, the former is up 1% and the latter 13%.
Hyundai Capital is the captive finance company of the Hyundai Motor Group, which now owns 79.8% after GE Capital sold a 23.3% stake late last year. The latter still owns a residual 20.2% stake, which it has said it wants to sell.
Joint bookrunners for the green bond were Bank of America Merrill Lynch, Citi and Credit Agricole.
Chinese issuance accelerates
By the end of 2016, the Asian green bond league tables look set to be dominated by China, which unveiled its own green bond guidelines shortly before Christmas.
"The Chinese regulations are broadly in line with the Green Bond Principles with a couple of Chinese characteristics," the Climate Bond Initiative’s Kidney commented. Specifically, this means Chinese issuers will need to publish quarterly reports and secure a second opinion certifying use of proceeds.
The government has set an initial quota of Rmb300 billion ($46 billion) but Kidney believes this is likely to be expanded as soon as it is used up given the government's commitment to reduce air pollution and clean up its environment.
As a result, the Chinese guidelines have a few quirks including the classification of coal as a potential source of green bond funding. Kidney said this made sense given the country still relies on fossil fuels but the government is trying tor reduce emissions by forcing companies to upgrade their mining technology.
So far, Shanghai Pudong Development Bank (SPDB) and China Industrial Bank have issued bonds to fund green industrial projects.
S&P Global Market Intelligence data shows that SPDB came first with a jumbo Rmb20 billion ($3.07 billion) deal on January 27. This three-year deal was priced with a 2.95% coupon and closed two times oversubscribed.
Similarly, China Industrial Bank raised Rmb10 billion ($1.57 billion) from a three-year deal with a 2.95% coupon. This also closed two times oversubscribed.
Next in line is likely to be Bank of Qingdao, which hopes to raise Rmb8 billion ($1.23 billion). Local media also reports that Industrial & Commercial Bank of China will come fourth.
Kidney concluded that the government has gone the right way about putting its own green bond guidelines in place.
"It was important they got the regulations and governance in place for issuers first and are only now debating how to incentivise investors," he remarked. "That way you minimise the risk of the scheme being abused.”
Incentives under discussing include relaxing banks' risk-weighted asset ratios in return for holding green bonds. However, some bankers believe this does not make sense at a time when Basel III is imposing higher capital ratios and favour tax incentives instead.
This article has been updated since first publication with final distribution statistics.
