Turkey adopted a green label for its debut ESG bond last week as it finally made its mark in the format, though how much difference it made to the deal's outcome compared with a conventional offering is debatable.
Turkey (B3/B; Moody's/Fitch) printed a US$2.5bn July 2030 green bond on Wednesday in a widely expected transaction following a roadshow of its sustainable finance framework last month. The issue priced at a yield of 9.30%, which was 30bp inside initial price thoughts, to leave a final premium over fair value of 20bp–25bp. The size of the concession was similar to those paid by Turkey in its two previous deals this year – both conventional – a US$2.25bn 2029 issuance in March and a US$2.75bn 2033 note in January.
While assessing any greenium – the pricing advantage of a green bond over a conventional one – isn't straightforward, bankers said it wasn't an important aspect of the deal. Nor did the deal bring a radically different investor base to Turkey.
"There were some green investors, but [they're] not the driver in EM transactions," said a banker at one of the leads. "[The green label] definitely helped to bring in new pockets of liquidity but I'm not going to say new names [were] involved. Turkey is a very well-established issuer and EM is a very well-established asset class."
The deal was more than three times subscribed, according to the finance ministry, from about 200 accounts. That was more or less the same outcome as its deal in March, and the breakdown of investors geographically was also similar, with UK accounts the biggest buyers at 31% – compared with 35% in last month's deal.
What the deal did do, however, is finally put Turkey on the ESG map more than a year after its framework was originally launched in November 2021. A combination of rates volatility and Turkey's own economic troubles meant that no ESG deal emerged last year. Instead, Turkey relaunched the framework this year and marketed it to investors through a non-deal roadshow in March.
Devastating earthquake
While some market participants had speculated about the possibility of a sustainable offering with both green and social use of proceeds – with reconstruction in mind following February's earthquake – several investors said a green only issuance made sense.
"The ESG framework that has been adopted with all its eligible green and social projects dates back to 2021 and does not encompass current projects for rebuilding and supporting the population in earthquake-damaged regions," said Sergey Dergachev, an EM fund manager at Union Investment. "It will take, in my view, several months until there is a full clear picture about how significant the damage from the devastating earthquake was, and also to develop a clearer action plan, especially on 'S'-related projects."
Impact assessment
There were other reasons why Turkey went for a green bond. "If you want to try to maximise [an ESG] transaction's impact, you would go green rather than sustainable," said a second lead banker. A green-labelled bond also scores higher in JP Morgan's ESG bond index.
"Looking purely on green issues, Turkey doesn’t look so bad," said one investor. "It does well in climate adaptation and has actually been reducing emissions intensity over time." He also said that Turkey has some timely green projects to fund, "such as afforestation projects and forest fire management following the widespread forest fires last summer".
However, some investors are also sceptical about Turkey’s environmental commitments. Although the country in late 2021 set a net-zero target of 2053, it was the last G20 member to ratify the Paris Agreement on climate change.
A green use-of-proceeds transaction, rather than a sustainable bond, also made it easier for those investors who have concerns around governance in Turkey to participate in the deal. Turkey's record on issues such as human rights and press freedom has come under scrutiny over the years.
"It’s an interesting exercise for sure as [the Sustainable Finance Disclosure Regulation], for example, says that sustainable investments should also have good governance – with the caveat that these regulations are typically written with corporates in mind," said the investor.
However, most investors' views on Turkey are largely conditioned by the possible returns that can be made and their assessment of the political outlook, with next month's presidential and parliamentary election defining events. The elevated yields that Turkey trades at and the carry on offer makes it an appealing investment for some. But Turkey's unorthodox monetary policy, overseen by president Recep Tayyip Erdogan, has led to several turbulent moments over the past few years.
Turkey's deal, which was lead managed by Bank of America, ING, JP Morgan and Standard Chartered, means the sovereign has funded 75% of its US$10bn target for the year.
The green bond was one of several ESG highlights last week that also included Cyprus's debut sustainable bond, a €1bn 10-year deal that got more than €12.5bn of orders, and an Italy €10bn long eight-year green bond (see Bond section for details).