Bank of China has made another push in the ESG arena with its Luxembourg branch printing a €300m (US$317m) 4% three-year bond with a green transition label, but the effort was overshadowed by its tight pricing.
The issue will support the green transition of China's steel sector, which requires US$3trn of transition financing, according to the Climate Bonds Initiative's estimate in 2022. Bond proceeds will be used for loans to four steel projects in Hubei province.
The market has started to realise the importance of transition finance, but many are still confused because of the lack of clear definitions and the possibility of greenwashing. A fund manager said he is interested in deals where transition fits into a company's overall business strategy rather than only a small part.
Bankers said BOC did a good job by combining international standards with additional requirements. The structure is in line with the International Capital Market Association's transition handbook, which outlines the disclosure criteria in terms of an issuer's overall transition strategy, but also followed the Common Ground Taxonomy, EU Taxonomy and Climate Bonds Initiative criteria and has a carbon lock-in avoidance requirement to enable the steel companies to adopt the latest transitional technology, said Chaoni Huang, BNP Paribas' head of sustainable capital markets for global markets in Asia Pacific.
"It fits into BOC’s overall strategy as well as how they engage with their clients in the steel sector,” said Huang.
Bank of China, Credit Agricole and BNP Paribas were joint structuring advisers.
A syndicate banker said there was investor feedback that BOC's transition framework was "credible with good safeguards and sector-specific criteria" and that BOC has "set the bar high".
"We didn't get a lot of push-back. Investors appreciate BOC's comprehensiveness and transparency," said the syndicate banker.
But bankers admit there are still misunderstandings about transition financing as some people associate it with greenwashing.
"Overall, the market requires a lot of awareness and capability building to understand what transition financing really means and how this can be implemented," said Huang.
Far off pricing
However, the transition finance angle was overshadowed by the tight pricing of the deal. The majority of the deal was bought by the leads with only a few funds participating for the ESG aspects, and many investors did not look at the deal long enough to examine the ESG credentials.
"The pricing is far off from the market pricing," said a second syndicate banker on the deal. "It's tighter than some of the deals from Triple A rated European issuers, so there wasn't much market interest in the deal."
The final order book reached €550m, including €480m from the leads.
The Reg S senior bonds, to be rated A1/A/A, in line with BOC's rating, were priced at 99.654 to yield 4.125%, or mid-swaps plus 60bp, inside initial guidance of 80bp area. The first syndicate banker said the BOC paid zero new issue premium.
Bank of China, Agricultural Bank of China, Bank of Communications, Barclays, BNP Paribas, China Construction Bank, China Minsheng Banking Corp, China Securities International, Citic Securities, CMB Wing Lung Bank, CNCB Capital, Credit Agricole, HSBC, ICBC (Europe), OCBC and UBS were joint lead managers and bookrunners.
Separately, Bank of China Frankfurt branch printed a Rmb1.6bn (US$219m) green Dim Sum at par to yield 3.2%.
Bank of China, Agricultural Bank of China Hong Kong branch, Bank of Communications, BNP Paribas, China Citic Bank, China Construction Bank (Asia), China Minsheng Banking Corp, China Securities International, Citic Securities, CMB Wing Lung Bank, Guotai Junan International, HSBC, Huatai International, Mizuho and Standard Chartered were joint lead managers and bookrunners for the trade.