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Green Bond Boom Sees ‘Brownium’ Penalty for Conventional Notes

Companies joining Europe’s booming green-bond market are reaping cost benefits alongside environmental ones, giving rise to a so-called brownium charge for conventional debt sales.


Volkswagen AG, Daimler AG and Orange SA priced bonds with environmentally friendly elements this month at significantly cheaper cost than their existing debt. And with demand surging for notes that are seen to do good, it means there’s effectively a pricing penalty if an issuer opts to sell non-green, or conventional, debt.


In Volkswagen’s case, the automaker will save almost 3 million euros every year, according to Bloomberg calculations. It raised 2 billion euros ($2.4 billion) across two green tranches, paying 15.4 and 13.6 basis points below its very liquid yield curve for eight and 12-year notes, respectively, based on data compiled by Bloomberg.


The price difference is “much more of a real factor in the primary market in a way it wasn’t a few years ago,” Arthur Krebbers, head of sustainability, corporates, at NatWest Markets, said by phone. There have been suggestions to tell borrowers that “pricing wasn’t as good because you went down a regular bond route,” he said.


It’s a similar tale for Orange. The French telecommunications group sold sustainability notes backing both social projects and green initiatives at 15.5 basis points below its existing debt curve on Sept. 9.


Most of this month’s green and sustainable offerings from non-financial corporates have followed the trend, with VW and Orange enjoying the biggest price savings versus their existing notes.


Analysts have been looking at the debt cost of companies with weaker environmental, social and governance credentials to find further evidence of a brownium. These firms are “having to pay up when they’re back on investors’ radar upon new issuance,” said Shanawaz Bhimji, a fixed income strategist at ABN Amro Bank NV. “Clearly, the notion of a ‘brownium’ is correct.”


Sales of ESG bonds make up around 8% of publicly syndicated euro-denominated corporate issuance, data compiled by Bloomberg show. Still, mounting evidence of a pricing differential could increase companies’ emphasis on green issues over conventional deals, according to Chris Bowie, who helps manage TwentyFour Asset Management’s sustainable short-term bond income fund. “The asset class is very favorable for issuers,” he said.


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