Bank of China (BoC) arranged another innovative transaction in the market with the Hong Kong branch pricing on 31 May 2018 the first ever sustainability bond from Asia amounting to HK$3 billion (US$384.60 million).
At the same time, the BoC London branch priced dual tranche green bonds totaling US$1 billion in floating rate notes (FRNs) — the fourth time that the bank has issued green bonds in the offshore market. The two transactions represent the first dual green bond and sustainability bond issuances in the region.
Ernest & Young has provided a pre-issuance independent limited assurance report for the issuance of the sustainability bonds, while Climate Bonds Initiative certified the green bonds against Climate Bonds Standards for renewable energy and low carbon transportation.
The two-year fixed rate sustainability bond offering was priced at par with a similar coupon and re-offer yield of 2.85%. This was in line with the final price guidance and 30bp inside the initial guidance of 3.15% area. The green bond issue was equally split at US$500 million each with the three-year FRN priced at par with a similar coupon and re-offer spread of 73bp over three-month Libor. This was at the tight end of the final price guidance of 75bp area (+/- 2bp) and 27bp inside of the initial guidance of 100bp area.
The other tranche was for five years and was also priced at par with a similar coupon and re-offer spread of 83bp over three-month Libor. This was likewise at the tight end of the final price guidance of 85bp area (+/- 2bp) and 27bp back of the initial guidance of 110bp area.
The bonds are issued under BOC's US$40 billion medium-term note programme. The net proceeds from the sustainability bonds will be used both for green projects and for social projects. The green projects include renewable energy, clean transportation, sustainable water and waste water management, and green buildings. The eligible social projects include affordable basic infrastructure such as clean drinking water, access to essential services, affordable housing and employment generation.
Due to its global network, BoC will allocate the net proceeds of the sustainability series bonds to eligible projects across various domestic and overseas markets. It has established an effective mechanism to manage the proceeds, ensuring that the proceeds from the sustainability bonds will be used to finance eligible projects.
The unallocated proceeds shall not be invested in greenhouse gas-intensive, highly polluting, energy-intensive projects nor in projects with poor social impacts. Such proceeds could be temporarily invested in sustainability series bonds issued by non-financial institutions in domestic or international markets, as well in money market instruments with good credit rating and market liquidity, or kept in cash until they are allocated to eligible projects.
Bank of America Merrill Lynch (BAML) acted as the green structuring agent as well as joint global coordinator for both the green bonds and the sustainability bonds, along with Bank of China, Bank of America Merrill Lynch, Credit Agricole CIB and HSBC. The four global coordinators also acted as the joint bookrunners and lead managers for the green bonds, together with BNP Paribas (Hong Kong), Citicorp International and Commerzbank. The four banks were likewise the joint bookrunners and lead managers for the sustainability bonds, along with Commonwealth Bank of Australia (Hong Kong).
According to a BAML report, Asia issued US$65 billion in green bonds during 2015-2017 – demonstrating a significant step-up in issuance as the region tackles climate commitments. By 2020, it forecasts the annual green issuance by China at US$55 billion, Japan and India at US$15 billion each, and Australia and Korea at US$10 billion each. It estimates the cumulative issuance in Asia will likely be US$250 billion over three years and US$600 billion over five years, with China expected to make up nearly half of the issuance.
