11 December 2015
There have only been a handful of green bonds from Latin America. This roundtable, organised by Environmental Finance with the help of the Inter-American Development Bank, explores how to scale up the market.
- Peter Cripps - Editor, Environmental Finance
- Gema Sacristan - Chief, Financial Markets Division, Inter-American Development
- María Tapia - Lead Investment Officer, Inter-American Development Bank
- Alba Aguilar Priego - Nuevos Mercados, SIF-ICAP 4
- Eduardo Piquero - Director General, Mexico2
- Jose Humberto Alarcon Torre - Technical Secretary, Mexican Banking Association
- Anadi Jauhari - Senior managing director, Emerging Energy & Environment Investment Group
- Sophie Robinson-Tillett - News Editor, Environmental Finance
- Sean Kidney - CEO, Climate Bonds Initiative
- Kurt Vogt - Managing director, head of Latin America commercial banking coverage, capital financing, HSBC
- Alexander Rau - MD, Climate Wedge
- Ricardo Torresi - Regional Investment Manager for Latin America, Zurich Insurance
- Julian Broide - Head of Latin America structured finance, Bank of America Merrill Lynch
Peter Cripps: This round table is about how to spur on the Latin American green bond market - we haven't really seen a great deal of issues so far.
Let's start by asking the Inter-American Development Bank (IDB) for a rundown on the state of play in the market.
María Tapia: There is huge potential for renewable energy, energy efficiency and forestry across Latin America, and we see more possibilities for project financing and securitisations than for typical green corporate issuers tapping the market. Aggregation is an example of what the private sector arm of the IDB is doing, aggregating pools of small environmentally friendly projects to create securitisations, or supporting banks with partial credit guarantees to tap green covered bonds.
Kurt Vogt: For the green bond market, the next frontier, really, is emerging markets. Latin America is obviously a big opportunity.
But there are two main obstacles: Number one: educating the market about green bonds. It is difficult at the moment to have a conversation with a CFO about issuing green bonds when there are currently no blanket pricing advantages.
The second: a lot of companies have green capex but not many have green investments of $250 million or $300 million, which is ideally the minimum size to have a liquid bond. So, we have to figure out solutions for the aggregation problem. One possible solution could be that intermediaries pool such green capex from several organisations and issue green bonds.
Ricardo Torresi: One of the main problems we face is local regulation. For instance: in Brazil institutional investors cannot invest in issues unless they are registered in the local market.
Another point is, regarding investment return in the corporate market, we are talking about countries that in most of the cases, apart from Mexico and Chile, are below investment-grade. So, when you face an investment that is coming from a AAA rated issuer, you say okay, but the local bonds are paying, 200/250 basis points more than this new issue So, what is the incentive to invest in this for local investors looking to earn a spread over government bonds? We all want to develop this market, but this is not philanthropy!
Peter Cripps: Is the small number of issues so far in Latin America down to a problem on the supply side or the demand side, or both?
Julian Broide: We helped issue, I think, the only green project bond in Latin America, from Energia Eolica. It won Environmental Finance's bond deal of the year. There was a good reception for this type of security, from both the international market and the local market.
On the other side, we have not seen a lot of supply, although I think we will see more in the coming months.
Anadi Jauhari: There are very strong fundamentals for renewable investments in the region. However, I think constraints still exist in the development of renewable and clean energy investment pipelines due to lack of availability of early-stage capital. The bigger story has to be, therefore, around how quickly the investment pipelines can be developed and how these assets can be aggregated, as renewable projects tend to be small, so once they reach a certain critical mass and credit quality they can attract green bonds.
Sean Kidney: We are looking, to get any market going, at high-grade government-backed issuance, and we have not yet seen that in Latin America – it is as simple as that. I should point towards the IDB! Demonstration issuance is critical.
There is scope for the IDB to issue a bond. And it is quite clear that in Brazil we need BNDES to do something.
I have lots of loose conversations in places like Mexico or Brazil about investors who might be interested. We kind of need a bond for them to come in on, to flush out demand – that's how we get things going. It is not going to start with a price differentiation.
Ricardo Torresi: If a company does not perceive that they are going to have a benefit in the future, whether it is economic or it is social or it is pure marketing, they are not going to issue.
Sean Kidney: But investor diversification does translate into money. The reason you pursue investor diversification is you gain a wider pool of investors so it is going to put downward pressure on the second and third and fourth issuance. You do not do it because it makes you feel good.
Stickiness is the same thing. The reason you develop a deeper engagement with an investor is because the next time you go to the market you just make a phone call. You do not need a roadshow. That cuts your cost of marketing.
While we would expect to see a benefit on price over time, in the long-run we are also trying to get governments to open the door by changing these regulatory settings preferentially for green.
We need the Brazilian government to rethink how they support issuance. We need credit enhancement in countries where we cannot currently get the right kind of credit rating to interest institutional investors like Zurich. That is the long game.
Ricardo Torresi: Brazil has a huge opportunity in terms of infrastructure and it is definitely something that has to be led by the government. I do not see companies issuing in the local market at 14/15% for long-term finance of infrastructure projects. It is something that if the government doesn't go ahead and do it, nobody will do it.
Peter Cripps: So are governments or multilateral development banks (MDBs) doing enough in LatAm at the moment?
Gema Sacristan: In contrast to what other local development banks and MDBs are doing, by issuing balance sheet green bonds the private sector arm of the IDB is using warehousing lines and partial credit guarantee products to support private sector green bond issuances.
We are creating the ecosystems for private sector actors to structure and issue green bonds in the local markets and develop the interest of local investors to mobilise private sector investment to green projects because, at some point, governments and MDBs need to step away.
Kurt Vogt: There are three areas where MDBs can have huge value in developing the green bond market.
If there is green investment happening which can be aggregated, the MDB could lend against it and issue a credit-linked note for, example. Then suddenly you are saying, 'Okay, I am putting my stamp of approval on it', and giving the investor the yield they are looking for.
The other thing a multilateral can do is buy green bonds and lead the way for other investors.
Then, finally, MDBs can play a role in structuring.
Peter Cripps: IDB, can you tell us more about the green bond you are planning?
María Tapia:Last year, we approved a green bonds securitisation pilot project Mexico. It is a two-step financing solution. A warehousing line to accumulate energy efficiency projects developed by Mexican energy service companies.
The second step is going to be the exit of our investment through the placement of the securitisation in the local capital markets. IDB will be partially guaranteeing the bonds. Right now we are at the accumulation step. We have not issued the green bonds. We expect that to happen by the end of 2016.
And this year, we are approving a second programme, trying to scale up lessons learnt in the Mexican pilot project and trying to replicate it in other countries in Latin America. So countries that we are targeting include Colombia, Chile, Dominican Republic and Jamaica.
Peter Cripps: So they will be secured by the cash flows from the assets, basically?
María Tapia: Yes.
Alexander Rau: I think if you put green bonds in the water, climate finance picture, there is a mechanism that has proven itself in terms of bringing projects to market, and that is the Clean Development Mechanism (CDM). That has had a very successful history, I would argue, in Latin America.
Now, it is a very different market and it is a different incentive mechanism because there is a revenue stream that is associated with it. However, if we are talking about projects, there is certainly evidence of supply that can come through international mechanisms and put forward rigorously verified projects to the market like this. Outside India and China, LatAm was the biggest market for CDM, so there are some lessons to be had there.
Sean Kidney: I am going to say that I am actually of a mind that energy is not the problem anymore. I think we are on the verge of winning the energy battle – the cost decline in solar and the about-to-start rapid cost decline in energy storage is, within five years, going to make energy arguments relatively academic.
The areas to act are much more around mobility, especially in Latin America, not just rail but bus rapid transit systems, or around buildings and water.
In China, the government see their role as driving the market. For example, they have said they will fast-track approvals for overseas bond issuance if it's for green renminbi bonds. (Every bond has to be approved by the regulator in China.) If they are doing green in Indian or European market, they have got approval overnight.
India, which is a far more decentralised government, is also starting to look at preferential support for green bonds.
If we are going to start a revolution, we need to embolden governments to act. That is the opportunity.
Part two of the roundtable, which will be published next week, discusses ways in which policymakers can encourage green bond issuance, and discusses the regional market's prospects.