News & analysis
SOCIAL BOND ISSUANCE RISING AS INVESTORS RUSH TO FUND COVID RESPONSE
The pandemic has presented an opportunity for debt inves- tors. Mona Dohle reports.
The market for covid bonds, a new fixed income vehicle aimed at funding the response to the current pandemic, is growing exponentially, and is expected to be worth $100bn (£81.6bn) by the end of the year. From closed shops, to rising unemployment, a global social care crisis and overburdened health services, the Covid-19 pan- demic is not only causing tangible economic destruction but has opened up unprecedented levels of demand for cash to help cope with the effects of the crisis. Global capital markets did not take long to spot the opportunity. Chinese banks were first to step forward. As early as mid-Feb- ruary, with the support of China’s central bank and regulator, a new fast track channel for bond issuance was established, which helped Chinese development banks, hospital builders and pharmaceuticals access much needed cash to tackle the crisis. The range of issuers soon grew to include car makers, airlines and food suppliers.
As the virus spread across the globe, so did the Covid bond label, which soon turned out to be a popular strategy to market fixed income products. Issuers now range from the Republic of Indonesia to the Nordic Investment Bank and the African Development Bank. Covid bonds fall under the broader label of social bonds, which has grown in popularity in recent months. Indeed, the social bond market’s gain has been the green bond market’s loss. While the social debt industry is set to become a 12-figure mar- ket by the end of the year, what has become the traditional way of raising debt to fight climate change has had its outlook low- ered to between $175bn to $225bn (£143bn to £183.8bn), down from an earlier $300bn (£245.1bn) prediction, according to Moody’s.
The popularity of social bonds during the Covid crisis was clear to see in April when such issuance overtook the level of debt raised through green bonds for the first time, according to data provider Refinitiv. But just as the green bond market has struggled with the lack of a clear defini- tion, so does its social cousin, and the emergence of Covid bonds highlights this challenge.
The most commonly-accepted definition of a social bond is put forward by the International Capital Market Association
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(ICMA), which requires that the proceeds of the issuance must be allocated to projects with clear social benefits. There should also be a clear and transparent process for project evaluation and selection in place, as well as transparent man- agement of the proceeds and reporting on the use and expected impact, the ICMA definition states. But given the rapid growth of the brand and the multitude of issuers, it is unlikely that all Covid bonds comply with these standards. Moreover, this defi- nition still leaves room for parts of the proceeds being allocated to other purposes.
Chinese regulator NAFMII (National Association of Financial Market Institutional Investors) only requires 10% of the pro- ceeds of the bond to be allocated to tackling prevention and control of the outbreak of the disease. Amsterdam-based ESG rating firm Sustainalytics has also attempted to narrow down the concept of a Covid bond by establishing a distinction between loans to healthcare services, pharmaceuticals or health insurers; and loans to mitigate the socio-economic impact of the pandemic. The latter includes lending to small and medium-sized businesses and charities that have been affected.
Besides challenges in ensuring that the money invested in Covid bonds is spent as promised, investors also face the credit risk, which can vary significantly, depending on the issuer. The Covid bond label has allowed corporates and governments to access the credit market at attractive rates. But default risks for emerging and frontier markets are rising rapidly. Examples include Ecuador, which sold $400m (£326.4m) worth of social bonds with a maturity of 15 years at the beginning of this year and are now trading at yields in excess of 7%. The South American republic is now one of 100 countries which have agreed debt suspensions with the IMF until August 2020. While the social bond market offers opportunities to tackle the crisis, investors should not forget the fundamentals and should consider the underlying assets behind the Covid bond label carefully.
Global ESG bond issuance
10 15 20 25
0 5
December 2019 January 2020 February 2020 March 2020 April 2020 May 2020 Source: Refinitiv Green Bonds Social Bonds Sustainability Bonds ($bn)
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