Woolworths' green bonds trade strongly in after-market – The Australian Financial Review

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The five-year bond issued by the retailer, which has a BBB crediting rating, paid 120 basis points over the five-year swap rate, or an initial yield to investors of 2.85 per cent.

Woolworths is not the first Australian issuer of green bonds;  the major banks and states such as NSW, Queensland and Victoria have raised debt in this format.

In the residential mortgage-backed securities market, National Australia Bank and Pepper Home Loans have sold green securitisation bonds.

Real Estate companies Stockland and Investa, and Monash University also have issued green bonds.

But the Woolworths deal attracted strong interest because it was a rare corporate bond issue.

Bankers hope more borrowers will issue debt via green bonds, with Bank of America Merrill Lynch forecasting $US600 billion ($837 billion) of green bonds will be raised in this format over five years in Asia alone. Australia is forecast to account for $US10 billion of this supply.

It is not clear whether borrowers are rewarded with a lower cost of funding or if such deals are more expensive than other forms of debt funding.

“It’s difficult to suggest that issuing a green bond would result in a materially improved primary market pricing outcome compared to a vanilla bond,” Mr Campbell said.

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While green bonds are typically issued at rates comparable to non-green bonds, research conducted by the Climate Bonds Initiative in September 2017 found green bonds tended to perform better in the secondary market and attracted at least the same interest in the book-build process.

In the case of Woolworths, which has limited Australian-dollar bonds outstanding, it was difficult to compare the pricing achieved by the green bond to a standard bond.

But Mr Campbell said the “green overlay” attracted the interest of a new cohort of investors, with mandates directing them to invest in sustainable projects.

“Woolworths likely would not have achieved a $2 billion order book if the bond was not green,” Mr Campbell said.

Green bonds are among a sub-set of fixed-income offerings that have attracted investments from funds that have considerations beyond financial returns. They can be issued by non-green issuers that are “in transition”.

In addition some fixed-income funds apply environmental, social and governance, or ESG, criteria that are broader in scope than assessing climate risks.

On that measure, some funds may refrain from investing in Woolworths, which has exposures to gaming and liquor.

The company has a score of 69 out of 100, according to Sustainalytics, a provider of ESG analysis to fund managers.