If de Volksbank's issuance of only the second ever green Additional Tier 1 is a test of whether attitudes towards the controversial product have shifted since its inception almost two years ago, then the results were inconclusive, as the muted €400m-plus demand for the €300m deal was blamed on credit and market factors rather than any misgivings over its ESG nature.
The AT1 market has waited a long time to see its second ESG-labelled transaction, after Spain's BBVA inaugurated the product with a €1bn perpetual non-call 5.5-year transaction in July 2020.
While ESG-labelled issuance has taken off in every other asset class that banks can issue, including subordinated Tier 2, issuers and investors alike have so far seemed to draw a distinction when it comes to AT1. BBVA attracted more than €2.75bn of demand, but also sparked debate over the appropriateness of combining use-of-proceeds ESG issuance with bank capital, and many parties – including the European Banking Authority – were sceptical.
De Volksbank was seemingly a natural candidate to follow. The Dutch lender's balance sheet was, as of the end of 2021, 55% climate neutral and it is aiming for 100% climate neutrality by 2030. The bank also plans to raise all its unsecured funding with green instruments.
Following investor calls on Tuesday, bookrunners ING, Goldman Sachs, Morgan Stanley, Societe Generale and UBS marketed the £300m no-grow perpetual non-call December 2027 transaction with initial price thoughts of 7% area.
With demand coming in at just £400m-plus, the coupon was set in line with IPTs.
Such a slim oversubscription ratio contrasted sharply with the demand for recent AT1s in other currencies. SEB and Julius Baer attracted orders in excess of US$5.4bn and US$3.7bn for respective US$500m and US$300m deals last week, while Virgin Money UK drew a more modest, yet still more than twice covered, £750m-plus book for a £350m deal on Tuesday.
The lack of movement from IPTs meant de Volksbank paid a sizeable premium, with bankers seeing fair value around the low 6s.
"It looks like it's been a tough trade, tougher than I would've hoped for," said a DCM banker away from the deal.
A banker at one of the leads said that in the context of a crowded and relatively tricky market, the level of oversubscription represented a decent result. "This market is one for pragmatism," he said.
Green credentials not in question
Investors' past misgivings over the concept of green AT1s included questions of how such bonds would be treated if the issuer was deemed to be failing, or likely to fail, given regulators could force the bonds to absorb losses and take writedowns on non-green assets.
BBVA was questioned over its ability to maintain and replenish a sufficient pool of green assets over the life of its AT1. That was seen as less of an issue for green Tier 2s – given they are dated, unlike perpetual AT1s – and that product quickly gained wider acceptance after de Volksbank brought it to Europe, also in July 2020.
But the new issue was seen as a different prospect from BBVA's trade because of de Volksbank's climate-neutrality targets.
Bankers therefore hesitated to attribute the muted demand to the deal's green nature. They instead pointed to de Volksbank's smaller investor following relative to its larger peers and to investors' preference for more liquid, benchmark-sized transactions from national champions.
"Is there universal demand for green AT1s? Absolutely not. Will there be universal demand for green AT1s? Absolutely not," said the lead banker. "But the interesting thing here, though, is there was never any focus [from investors] on the underlying assets because the balance sheet is by definition green. ... If it was an issuer who had ring-fenced a certain portfolio of green assets to underpin the green, that would be different.
"We had a couple of investors previously that had been naysayers of green capital come in because they were comfortable with the credit being green and green-focused."
Bankers away from the deal echoed that view.
"My view is that if there is any bank that would be able to do a green AT1, de Volksbank would be the one, or at least one of the very few, as they have a clear path to being a fully green bank," said the DCM banker away from the deal.
A second banker at one of the leads said the deal did not, however, benefit from the demand and pricing advantage typically enjoyed by green bonds because many green funds are not active in the AT1 space.
He said the quality of the book was nevertheless high.
"Clearly, we were missing volume and broad participation, and missing some of the faster money accounts to an extent, given they didn't see the liquidity of the bond as something tradeable," he said.
Aviva debuts
On a relatively busy day in the FIG capital space, UK insurer Aviva secured a convincing result with its inaugural Restricted Tier 1.
Leads Barclays, Citigroup, HSBC, JP Morgan and NatWest Markets priced the £500m perpetual non-call 10-year deal at 6.875%, inside IPTs of 7.25% area, on more than £1.75bn of demand.
A banker at one of the leads said the deal was priced roughly flat to fair value.
"There was very strong support for this inaugural transaction from a national champion, gold standard name," he said.
Elsewhere, Vienna Insurance Group and Landesbank Hessen-Thueringen printed euro-denominated Tier 2 transactions on Wednesday.
VIG landed a €500m deal at 295bp, 25bp inside IPTs, on more than €1.3bn of orders, while Helaba priced a €550m deal at 275bp, down from IPTs of 290bp–300bp, with demand coming in above €820m.