IFC seeks market evolution with first Kangaroo social bond
The Australian responsible-investment market has taken another evolutionary step with the pricing of the inaugural Kangaroo social bond by International Finance Corporation (IFC). The issuer says the deal presented challenges, but IFC is confident the product will grow. Meanwhile, intermediaries say the transaction displays strong Australian investor appetite for the product.
IFC priced a A$300 million (US$233.7 million) five-year social bond on 6 March, led by ANZ, Deutsche Bank and Nomura. The deal is the first Kangaroo social bond, and the second Australian dollar social bond after National Australia Bank’s self-led A$500 million gender-equality bond issued in March 2017.
According to Marcin Bill, Washington-based senior financial officer at IFC, the issuer has been closely watching the responsible-investment space in Australia. “Following the launch of our social-bond programme in March 2017 and seeing growing global interest in the social bond market, including out of Australia, we started firming up our plans during the current fiscal year.”
Having recently published its Social Bond Impact Report 2018, Bill says IFC has been looking to diversify and extend its social-bond programme, and Australia was the natural next step.
IFC’s Social Bond Impact Report 2018 reveals that prior to the Kangaroo transaction IFC had issued US$667 million in social bonds since the programme’s inception in March 2017. More than 93 per cent of this had been issued in US dollars, with the proceeds being allocated to projects primarily in financial markets and agribusiness in developing countries.
“The clear use-of-proceeds language IFC has used is a key factor in this style of transaction,” says Oliver Holt, Singapore-based executive director, syndicate at Nomura.
“Australian dollars is an important market for IFC, so having issued several deals from the social-bond programme, mainly in US dollars, it was a natural progression to look to further diversify that programme by issuing in Kangaroo format,” says Paul White, Sydney-based co-head of capital markets at ANZ.
Rod Everitt, Sydney-based head of Australian dollar syndicate at Deutsche Bank adds: “It is part of IFC’s ambition to build this programme and look at jurisdictions where it can raise these funds. IFC is aware that there are funds in Australia that are mandated to look at this type of product, and this was evident in the final book.”
The transaction received strong support from Australian-domiciled investors, which were allocated 75 per cent of the final book according to the issuer. Of the remainder, 25 per cent was allocated to Asian investors and 5 per cent went to Europe. Banks bought 54 per cent, with 40 per cent going to fund managers and the remainder taken by central banks or official institutions.
“This account diversity is very encouraging for the market going forward. More funds are being set up and more money is being allocated so this will continue to evolve and provide more demand for these products. The more money there is in these funds the greater the volume achievable in these deals.”
The transaction allowed IFC to diversify its investor base, with a broad range of accounts participating that the issuer would not normally see in the book for its vanilla bonds, according to Holt.
Everitt adds: “This account diversity is very encouraging for the market going forward. More funds are being set up and more money is being allocated so this will continue to evolve and provide more demand for these products. The more money there is in these funds the greater the volume achievable in these deals.”
With demand for these products currently outstripping supply, White reveals that although it is still more developed in Europe, there is a trend evolving domestically, of responsible-investment-labelled bonds outperforming similar vanilla bonds in the secondary market. However, he stresses the caveat that there is still very limited issuance to measure this effectively.
“The fact that there is still relatively limited supply in this space, combined with the typically smaller volume sizes means these types of bonds do tend to outperform their vanilla counterparts in secondary,” says White.
“Demand-supply dynamics can be slightly out of step for these deals. Demand is steady but issuers aren’t lining up to do these deals because their needs for this type of funding aren’t as large as their normal funding needs. This naturally drags secondary trading tighter,” adds Everitt.
The suite of responsible-investment products being offered to investors continues to grow. As well as green bonds, in the last 12 months Australian dollar investors have had the opportunity to buy climate bonds, climate-awareness bonds, sustainability bonds, gender-equality bonds and green securitisation.
Bill says IFC’s social-bond programme aligns with the social-bond principles developed by the International Capital Market Association. However, he adds that “despite the recently developed guidelines, there has been limited unification for social bonds, which could potentially mean some ESG-mandated investors have difficulty buying this type of product”.
“It is much more complicated to certify or verify a social bond because they are less homogenous than green bonds, for example. Social bonds span across industries and across different measurements of performance and at this stage there is no major certifying body that is equipped to provide a certification that would add value.”
However, White tells KangaNews:“Overall, given the status and magnitude of IFC as an issuer, its consistent approach to the market and its social-bond impact reporting, the lack of a social-bond verification was not such an issue for investors.”
“This transaction displays the investor appetite for responsible-investment-labelled bonds in the Australian market,” says Holt. “Funds with these mandates were able to see what the use of proceeds are and were compelled to participate in the transaction.”
Furthermore, White believes the more products available for investors looking for impact, the healthier the market will be. “It is great to see IFC bring an innovative product to the Australian dollar market. It adds to the diversity and size of the market and this can only make it more attractive for future issuance.”
Bill reveals that IFC’s agenda behind the social-bond programme is to try to push boundaries and bring innovative, homogenous products to the market. “Borrowers have been issuing bonds that address various social issues but they are not necessarily bringing them under the common denominator of a social bond, which is what we are trying to achieve.”
Despite facing some challenges in issuing the first Kangaroo social bond, Bill is enthusiastic about the product’s prospects. “This is the next step in the evolution of the ESG-investing space. Green bonds have gained momentum and become a mainstream product in many markets. We believe with our transparent approach to reporting and use of proceeds we will be able to help grow this space.”