Asia-Pacific Structured Finance Issue: FlexiGroup’s A$260m Green ABS

Australian consumer-finance specialist FlexiGroup printed a landmark securitisation in April that proved investors are willing to pay a premium for exposure to environmentally responsible assets.

The A$260m (US$199m) Flexi ABS Trust 2016-1 is the world’s first Green ABS to be certified under the Climate Bonds Initiative’s global standard. It is also Australia’s first securitisation to include a Green tranche, with A$50m of A2G notes backed by loans for residential rooftop solar power systems.

Crucially, that tranche, which benefited from a A$20m cornerstone investment from the Australian government’s Clean Energy Finance Corp, was priced 5bp inside an identical portion secured against non-green assets – a feat that few other Green issues have managed globally.

The tighter pricing points to a growing market for ethical investments in Australia, suggesting that other issuers may be able to follow suit.

FlexiGroup’s A$60.5m of A2s, secured against a range of consumer loans, were priced 155bp wide of one-month BBSW, while the Green A2Gs pay 150bp. Both notes had 1.37-year weighted-average lives and 22.5% credit support.

Green securitisations have yet to appear in Europe but are reasonably common in the US, where, for example, five solar ABS issues raised US$560.5m before FlexiGroup hit the market Down Under.

Bankers away from the deal expect the trade to be replicated, but stressed that growth was limited by the finite amount of receivables that qualify for green certification, beyond loans for solar panels and hybrid vehicles.

FlexiGroup’s pricing advantages have yet to be seen in the senior unsecured market, where Australia lags offshore markets.

The World Bank, German agency KfW, NAB and ANZ are the only issuers of senior unsecured Green bonds in Australian dollars, all of which came flat to their standard curves.

The Australian dollar market is also still waiting for the first Green corporate bond, even though the format is a good fit for many companies with natural climate-aligned assets that can be ring-fenced for a securitisation.

Sceptics believe the absence of any “good cause” premium, whereby green investors accept lower yields over conventional bonds, will restrict senior unsecured issuance from otherwise reluctant issuers.

However, a Sydney-based origination manager expects the Green market to expand Down Under in response to the growth in funds with ethical mandates that will inevitably increase price tension for such deals.

According to the Responsible Investment Benchmark Report 2016, socially responsible investments in 2015 in Australia surged by 62% to A$51.5bn, or 3.8% of total assets under management, up from 2.49% the previous year. This expansion followed 50% and 24% growth rates in 2013 and 2014.

National Australia Bank, Australia’s leading securitisation and Green bond house, was arranger and joint lead manager alongside Commonwealth Bank of Australia.