IADB’s debut Kangaroo EYE bond adds welcome supply to Australia’s social-bond sector

The specificity of Inter-American Development Bank (IADB)’s inaugural Australian dollar EYE – education, youth and employment – bond was key to its robust execution outcome, deal sources say, as local demand increases for high-quality and clearly defined use of proceeds for social-bond issuance. IADB has only previously issued public benchmark EYE bonds in US dollars.

The A$500 million (US$355.7 million) five-year deal was priced on 10 April by ANZ, Commonwealth Bank of Australia and J.P. Morgan. It is the joint-largest social bond issued in the Australian market, equal with National Australia Bank’s A$500 million five-year gender-equality bond issued in March 2017. It also follows benchmark-sized social bonds by International Finance Corporation in January this year and National Housing Finance and Investment Corporation in March.

Laura Fan, head of funding at IADB in Washington, tells KangaNews that the EYE bond funding programme was introduced with an inaugural issuance in US dollars in September 2014 and centres around developing human capital in Latin America and the Caribbean through a life-cycle approach.

“This starts with early childhood care, progresses to formal primary and secondary education, and provides programmes to facilitate labour-market placement by improving the transition from school to work through vocational training,” Fan explains.

Narrowed focus

The nascent social-bond market has undergone scrutiny for what some have perceived as an overly broad and vague agenda. For example, it is more complicated to certify or verify a social bond because it is less homogenous than a green bond and can also span across different measurements of performance.

However, IADB’s global reach and, Fan adds, the EYE programme’s well-defined project-eligibility criteria for how proceeds raised from EYE bonds are used, meant the issuer was able to draw upon the programme’s accomplishments in the last few years. “We were able to fund programmes in Uruguay for education innovation and programmes in Bolivia to support employment,” she says.

Ryan Chamberlain, Australia syndicate, at J.P. Morgan in Sydney, acknowledges that being able to demonstrate the success of EYE bonds issued in different currencies – whether in public or private format – was advantageous to this deal, specifically being able to demonstrate how the proceeds have been used.

Fan says IADB has prioritised its engagement with the Australian socially responsible investment buyer base that was previously unfamiliar with IADB’s brand. Part of this interaction was to inform these investors about the EYE programme’s objectives and projects.

Chamberlain tells KangaNews that investors had demand for the deal because it was unique in the sense that it has a specified theme. “What investors like about the EYE bond programme is that it narrows down the broad social-bond field and gives it more shape,” he says.

Paul White, global head of capital markets at ANZ in Sydney, says demand was robust because of the environmental, social and governance (ESG) footprint, which he says has been established by the investor engagement carried out by IADB’s funding team for this programme in educating investors, both domestically and globally, in the last couple of years.

Despite social-bond deals typically attracting a smaller pool of investors than green bonds, White says more than 30 investors took part. “While the overall investor community can be smaller for social bonds, in this instance it was viewed on par with comparable green-bond issuance by SSA [supranational, sovereign and agency] borrowers.”

Sights on Australia

While IADB has issued off the EYE bond programme in several currencies, the Australian dollar deal is only its third public benchmark, after US dollar deals in 2014 and 2018. “We have been speaking with Australian domestic investors about an EYE bond since the inaugural 2014 US dollar issuance and it has taken this long for certain investors to approve our name,” Fan tells KangaNews.

Distribution data provided by IADB show that 50 per cent of the bonds were placed with Australian real-money accounts (see charts). Fan insists this speaks to appetite for ESG product in Australia as she points out that 50 per cent domestic placement is high in the context of recent IADB Kangaroo issuance. Forty-two per cent was sold to a combination of light and dark green investors and the remainder to grey.

Source: Inter-American Development Bank 16 April 2019

Source: Inter-American Development Bank 16 April 2019

“We targeted Australia for our third public EYE bond benchmark because we recognised that many Australian investors have a strong interest in ESG product. We wanted to tap into this demand as well as diversify our investor base,” Fan adds.