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Sovereign green bonds set for modest greenium at maiden issue

Informist, Tuesday, Jan 24, 2023


By Shubham Rana


NEW DELHI – The government will have no trouble finding takers for its maiden offering of sovereign green bonds on Wednesday, but bond market participants are of the view that the Centre may not get the greenium, or the green premium, it was hoping for.


Greenium refers to the pricing advantages of green bonds because investors are prepared to pay more or accept lower yields because these count towards sustainable financing.


The government had first announced that it will issue green bonds in the Union Budget for 2022-23 (Apr-Mar) as part of its overall market borrowing. Proceeds from the sale of green bonds will be deployed in public sector projects which help in reducing the carbon intensity of the economy.


On Wednesday, the government will sell 40 bln rupees of green bonds maturing in 2028 and 40 bln rupees of bonds maturing in 2033.


While the government has been hoping to push these papers at substantially lower yields than those on its regular bonds, the feedback from market participants so far has been rather mixed.


On one hand, there are the foreign investors for whom the purchase of green bonds would count towards their sustainable financing targets. For these investors, there is a clear incentive to settle for a low yield on Indian sovereign green bonds, which currently also have a novelty factor associated with them. Even after adjusting for the greenium, these papers are a lucrative investment as yields on Indian bonds are higher than those of its peers.


Back home, it is the insurance companies that seem to have a good reason to bid aggressively for the government’s green bonds. The Insurance Regulatory and Development Authority of India has allowed insurers to treat their investment into sovereign green bonds as investment in infrastructure.


It is no surprise that Indian authorities have enthusiastically marketed these bonds to FPIs as well as insurance companies.


But on the other hand, various categories of domestic investors, such as banks, do not have an incentive to consider these bonds as any different from regular investments in Indian sovereign debt. At present, banks represent nearly 40% of the country’s government securities market.


Earlier this financial year, government officials had hinted that a premium of around 15 bps would be a fair level for the sovereign green bonds. According to a US Federal Reserve discussion paper published in June, global green bonds yields are around 8 bps lower compared to traditional bonds.


However, bond traders expect cutoff yields at the upcoming green bond sale to be set at a mere 5 bps below that on gilts of comparable tenors.


“If the government has struck deals with investors who specifically invest in green bonds, then we may see the coupon 10-15 bps below gilts,” a senior trader at SBM Bank India said. “However, if this is not the case then demand may be less and coupon could be around the current market level (for gilts).”


While media reports suggest insurers have reached out to IRDAI for clarification on how to classify their investments in green bonds being issued for the first time, market participants said this would not be a hindrance going into the first auction.


“The demand will be good for India’s maiden green bond issue on Wednesday. Issue may clear at levels slightly better than prevailing g-sec yields,” Churchill Bhatt, executive vice-president, Kotak Life Insurance, said.


Other category of investors may be less enthused about bidding at the maiden auction. Dealers at state-owned banks, private banks, and primary dealerships said they would assess the demand at the first auction before looking to invest in the secondary market and in the subsequent auction.


Moreover, not all categories of foreign investors may be lured by the environmental, social, and governance investment feature of the green bonds.


“We have not heard even a whisper from our foreign clients for (sovereign) green bonds,” a dealer at a primary dealership said. “If it was dollar-denominated, there may have been a chance, but there is no interest for rupee-denominated (instruments).”


The when-issued market also does not indicate aggressive pricing for the new papers. Today, the new five-year, 2028 green bond was bid at 7.25%, 9 bps higher than the yield on the 7.38%, 2027 bond. The new 10-year, 2033 green bond was bid at 7.40%, 5 bps higher than the benchmark 7.26%, 2032 paper.  End


Edited by Aditya Sakorkar


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Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.


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Source: Cogencis

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