Cover story – Covid bonds
Emerging markets are home to some of the main Covid bond issuers, but many countries are now on the brink of another sovereign debt crisis. An indication of that is the fact that the IMF has granted $500m (£402.7m) of debt relief to 25 frontier markets struggling with the costs of the pandemic, and debt suspensions in more than 100 emerging and frontier markets. Moreover, a recent default by irrigation company Jain Irriga- tion Systems in India on some of its green bonds highlights that investing ESG-compliant investing does by no means equate to a risk-free portfolio.
One example of the rising sovereign debt risks for emerging markets is Ecuador, which sold $400m (£322.3m) of social bonds with a maturity of 15 years at the beginning of this year. That debt is now trading at yields above 7%. The South Ameri- can republic has also agreed debt suspensions with the IMF on some of its loans. If Covid-19 does contribute to more wide- spread defaults among emerging markets, pension funds might find themselves in the difficult situation of having to pressurise already-cash strapped nations for repayments, or risk losing their member’s money. Khoenkhoen also stresses that given the scheme’s mandate to safeguard member’s money, investing in social bonds should not be equated with charity. “Social investments do not mean that we give up on returns,” she says. “We are an active inves- tor and are looking for investment opportunities which offer the right-risk return balance.”
Cheseldine agrees that investors need to tread carefully when looking to buy Covid bonds. “Investors need to be clear on the potential default rates. You can’t just say blindly that Covid bonds are going to be good, you need to look behind them and who is offering them,” he adds. Wesbroom says that getting good quality advice is crucial here. “Investors will need an adviser who can help you understand the structure of the bonds. “You will need somebody that can help you understand in depth of the truth behind that, and the likelihood of future claims, otherwise these things are wonderful investments but you have a very small marginal return for quite a long time until it’s suddenly game over. And then you’re wiped out if you’re not careful,” he adds.
Where next How durable will the trend towards social and sustainability bonds be? If scientists and policy makers manage to get the effects of Covid-19 under control, the setting for social bond issuers could change dramatically. Given that most Covid bonds tend to have a shorter maturity, is there a chance that the trend might blow over before it has really started? Khoenkhoen stresses that the growing interest for social bonds
Issue 94 | July 2020 | portfolio institutional | 25
has already preceded the crisis, but that the pandemic has played an important role in consolidating the importance of social bonds.
“The SDG framework has helped institutional investors to vis- ualise which social and sustainability bonds can be assessed, making investors increasingly open to the asset class,” she adds. “We hope that by publicly talking about our social bond investments we can generate a domino effect and encourage other institutional investors to join in. “Ultimately, we are all collectively responsible for sustainable development.”
Ultimately, we are all collectively responsible for sustainable development.
Asha Khoenkhoen, ABP
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