EU kicks off green bond issuance to finance NextGenerationEU
Today, the EU launched its first-ever green bond to finance part of its NextGenerationEU (NGEU) programme. The inaugural NGEU green bond set a new record, as it is the biggest-ever green bond at issuance.
ABN AMRO Group Economics
Author has left ABN AMRO, see text
This comment is written by Floortje Merten
EU kicks off green bond issuance to finance NextGenerationEU
Today, the EU launched its first-ever green bond to finance part of its NextGenerationEU (NGEU) programme. The inaugural NGEU green bond, with a 15y maturity and a size of EUR 12bn, immediately set a new record, as it is the biggest-ever green bond at issuance. The bond followed non-green NGEU bonds issued earlier this year since June.
Overall, the EU plans to issue around EUR 80bn in bonds this year, whilst ramping up issuance over the next couple of years until it has financed a total EUR 807bn NGEU fund by the end of 2026. 30% of this amount is expect to be issued in green format, corresponding to an amount of around EUR 242bn, of which we expect around EUR 20bn to be issued in 2021..
The debut NGEU green bond was met by huge investor demand of over EUR 135bn
Consequently, the deal was over 11 times covered, in line with high demand for previous EU issuances under both the NGEU and the SURE program. Moreover, we think that today’s NGEU green bond is particularly attractive as it was priced at around its fair value (mid swap -8bp) in the absence of a greenium. However, we judge that the bond should eventually trade significantly more expensive than non-green EU bonds, in line with for example Germany’s sovereign green bonds. Indeed, these trade at significantly tighter levels than their non-green comparables, reflecting a greenium. Based on this, we think that the greenium on the 15y NGEU green bond can grow to around 5bp eventually. Besides that, we see room for performance on the back of improved liquidity and increased attractiveness of NGEU bonds. Other NGEU bonds have shown significant performance after launch as well.
The proceeds from the bond issuance will be used to finance or refinance eligible green expenditures of member states. In order to be able to access NGEU funds, member states have submitted reform plans to the EC, of which at least 37% of the expenditures were required to be related to meeting climate change objectives.