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Treasury & Capital Markets
MTR makes green bond debut in tightly priced deal
Chito Santiago 1 Nov 2016
The MTR Corporation returned to the US dollar bond market in a big way after a four-year absence as it priced on October 24 a US$600 million green bond offering, representing the first such issuance from an Asian rail company. This is the second green bond transaction out of Hong Kong following the US$500 million deal by The Link Reit in July.
 
The Reg S 10-year issue was priced at 99.675% with a coupon of 2.50% to offer a yield of 2.537%. This was equivalent to a spread of 80bp over the US treasuries, which was in line with the final guidance, and 15bp inside of the initial guidance of 95bp area. The bonds performed in the secondary market as they tightened to 76bp during mid-morning of October 25.
 
“Investors are happy to see the MTR Corporation back in the market and supported the deal despite the tight pricing,” says a banker familiar with the deal.
 
MTR CEO Lincoln Leung describes the deal as a milestone for both the company’s financial and environmental strategies. “Utilizing green finance in this way allows us to tap into a new investor base and provide cost-effective financing to invest in environmentally friendly service and network enhancements as envisaged in the Rail Gen 2.0 vision,” he says.
 
When completed, Rail Gen 2.0, which MTR announced the launch in early 2016, will offer passengers increased services, provide enhanced environmental benefits to the community and create an extended “next generation” rail network.
 
The green bond offering is prepared according to green bond principles and is made publicly available together with the second party opinion from Sustainalytics and will drive MTR’s investment in service enhancements and environmental performance.
 
Proceeds from the offering will be used to fund or refinance eligible investments as set out in MTR’s green bond framework. These include low carbon transport projects, energy efficient projects, sustainable transit stations and real estate properties, adaption to climate change, water and waste management, and pollution prevention
 
In terms of fair value, one the deal’s closest comparable is PSA Singapore, whose recent 10-year offering was trading at 81bp over the US treasuries or a G-spread of 84bp – which MTR managed to price through.
 
The transaction attracted an order book of US$1.4 billion at re-offer from 94 high-quality accounts, enabling MTR to upsize the deal from the original amount of US$500 million. In terms of geographic distribution, 83% of the bonds are allocated in Asia-Pacific and 17% in EMEA, which the banker says is better than what the other green bond transactions out of Asia have achieved. For instance, only 4% of the US$500 million green bonds by The Link Reit was distributed in Europe.
 
Bank of America Merrill Lynch and HSBC acted as advisers to the deal, as well as joint book runners and lead managers, along with Goldman Sachs.
 
The latest offering illustrates the increasing appetite for this asset class. In fact, green bond issuance reached another peak in the three months ended September this year with the strongest quarterly volume yet of US$26 billion, according to Moody’s Investors Service.

This brought the year-to-date issuance volume to a new high of US$63 billion. And with the robust offerings from Chinese financial institutions in particular, full year issuance is on pace to exceed US$80 billion, says Moody’s.

That amount would nearly double last year’s issuance and represent an increase commensurate with total growth over the previous nine years. The growth reinforces efforts to acknowledge and address climate change, highlighted by the Paris Agreement on climate change going into force in November.

Significant issuance from Chinese banks contributed to China accounting for a leading 44% of global issuance. Beyond China, supranationals and Mexico ranked second and third with 16% and 8% of global issuance, respectively.

A total of 50 issuers came to market with 77 transactions, a slight decline from the 54 issuers and 81 transactions in the second quarter of 2016. The average transaction size increased, averaging about US$338 million.

 

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