Australia and New Zealand Banking Group has sold the first Tier 2 capital bond linked to the United Nation’s sustainable development goals (SDG) in the Australian market.
The self-led A$1.25 billion ($900 million) 10.5-year deal printed on 20 August with a coupon of three-month BBSW plus 185 basis points. That gave the bond a coupon of 1.95% when it was issued.
The bond has a first optional redemption date in February 2026.
ANZ group treasurer Adrian Went said that investor demand for the bond was strong. The book was almost covered twice over which allowed pricing to come in 15bp from guidance of BBSW plus 200bp area.
The bond has an expected rating of Baa1/BBB+/A–.
The majority of the book stayed onshore with almost 90% going to domestic investors. The remainder went to Asian investors with 4% to New Zealand.
“The transaction uses our SDG bond framework which links our asset base to certain United Nations’ sustainable development goals, giving our investors a unique opportunity to drive positive environmental, social and sustainability outcomes while earning an attractive rate of return,” said Went.
The bond is ANZ’s third issuance under its SDG bond framework with the two previous issues both sold in Europe.
In February 2018 it sold a €750 million ($886.5 million) five-year SDG Eurobond at 0.625% which was followed, in November last year, by a €1 billion 10-year SDG Tier 2 Eurobond at 1.125%.
The bank now has around A$4 billion-equivalent of SDG bonds on issue.
The 2031s performed well in the secondary market with the bond seen a couple of basis points tighter the next day.
INTEREST IN SUSTAINABLE DEVELOPMENT
There has been a renewed interest in SDG bonds this year thanks to the Covid-19 pandemic with issuance expected to pick up and expectations that the markets could even see the first sovereign issue before the end of December.
The first SDG bond in Asia goes back to December 2018 when the World Bank sold $3.5 million five-year bonds via BNP Paribas with the returns linked to an equity index that tracks the performance of companies advancing global development priorities set out in the SDGs, including climate, gender, and health.
The index tracks 30 companies that, based on the methodology developed by international ESG research provider Vigeo Eiris, dedicate at least one-fifth of their activities to sustainable products, or are recognised leaders in their industries on socially and environmentally sustainable issues.
Pascal Fischer, head of global markets for APAC at BNP Paribas, called it “a new frontier”.
But in June this year, the United Nations Development Programme (UNDP) released new standards in an attempt to harmonise standards for private equity fund managers and bond issuers.
"Investors want useful guidance and tools to make better-informed decisions to help them allocate and manage investment and drive capital to where it is needed most," said UNDP administrator Achim Steiner.
The second set of bond standards to be released, the aim was to make issuance more streamlined and user-friendly.
“This is still an emerging field and there is much for us all to learn,” said the UNDP’s SDG impact director Elizabeth Boggs-Davidsen.
“Bringing rigour and transparency to impact management on a consistent and comparable basis will develop our understanding how investments contribute to the SDGs and help investors make more informed decisions,” she added
BANK CAPITALISATION
But the new issue from ANZ is not just driven by sustainable development goals, rather it is also a reflection of the significant targets set by the Australian Prudential Regulation Authority (APRA) for banks to secure their capital and to minimise the need for taxpayer support, in the event of failure.
“The global financial crisis highlighted examples overseas where taxpayers had to bail out large banks due to a lack of residual financial capacity. Boosting loss-absorbing capacity enhances the safety of the financial system by increasing the financial resources that an authorised deposit-taking institution holds for the purpose of orderly resolution and the stabilisation of critical functions in the unlikely event that it fails,” said John Lonsdale, deputy chairman of the APRA.
The regulation authority has told the country’s big four lenders – National Australia Bank, Commonwealth Bank, Westpac and ANZ – to raise their Tier 2 capital by 2024.
“By lifting their total capital by three percentage points of risk-weighted assets, we estimate the major banks will cumulatively strengthen their loss-absorbing capacity by A$50 billion,” he added.
APRA estimates that the increase in total capital requirements will have a small impact on overall funding costs – less than five basis points – which, it says, is well within the range of analysis conducted by the Reserve Bank of Australia using historical market data.
