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Swedish investors lead the way in surge of social bond issuance
Initial surge of activity over the past six weeks has come from supranationals
15 Apr 2020 | Michael Marray

AS the focus on the corona crisis turns from health protection towards re-starting economic activity in China, the US and Europe, a boom in social bond issuance is getting started.

Over the past few years it has been green bonds that have established themselves as a new asset class, with many institutional investors setting up dedicated green bond portfolios within their overall environmental, social and governance (ESG) frameworks.

But with spending on healthcare about to rise sharply as countries assess ways to avoid future economically damaging lockdowns, and with programmes needed to get the unemployed back into work, social bonds are no longer going to play the role of poor cousin to green bonds.

The initial surge of activity over the past six weeks has come from supranationals - and it is Swedish investors that have stepped up as the biggest buyers.

In late March and early April, the Nordic Investment Bank issued so called Response Bonds in both euros and Swedish krona. And in early April, the African Development Bank (AfDB) launched its Fight Covid-19 Social Bond denominated in krona, having a few weeks earlier also tapped the dollar market. 

Also in early April, the Council of Europe Development Bank sold a 1 billion euro Covid-19 Social Inclusion Bond. And the European Investment Bank has done two offerings of Sustainable Awareness Bonds, for 3 billion krona and 1 billion euros.

Earlier, in the first half of March, the International Finance Corporation priced two deals, one for 3 billion krona and another for US$1 billion.

Three Swedish institutional investors bought the entire krona denominated private placement from the IFC, which is a unit of the World Bank involved in private sector projects.

Folksam Group, one of Sweden's biggest insurance groups, took 700 million krona. Folksam is already a well established green and sustainable investor. It is one of the initiators of the Net-Zero Asset Owner Alliance. Together with some of the world's largest pension and insurance companies, the Folksam Group has committed to its investment portfolios having zero net greenhouse gas emissions by 2050.

Insurer Lansforsakringar took 300 million krona, while Alecta Pensionsforsakring was the single largest investor with 2 billion krona.

“Through this investment, we both help to counteract the negative effects of Covid-19 and to create security for companies and their employees," comments Tony Persson, head of the interest and strategy group at Alecta. "This type of investment in social bonds benefits both communities and our customers in the long term."  

On April 3, the African Development Bank (AfDB) initially issued 2.5 billion krona of three-year bonds, and then quickly followed up with a tap issue of 500 million krona.

These krona bonds are part of the planned series of “Fight Covid-19” Social Bonds, which began on March 27 with a US$3 billion deal. The krona bonds pay a 0.2425% coupon and were priced at 14bp over mid-swaps. The transaction was led by Danske Bank, and the proceeds will go to projects that will enhance access to essential health and healthcare services.

The anchor investors were insurance companies Skandia and Länsförsäkringar Liv.

“Through this Covid-19 social bond issued by the AfDB, we provide support and financing to African countries and businesses in the fight against this pandemic,” says Jakob Carlsson, CEO of Länsförsäkringar Liv. “It is a global challenge and crisis that needs to be tackled on all continents. We value in particular the AfDB’s strong contributions and focus on measurable social development outcomes in this issuance, and its alignment with UN Sustainable Development Goal number 3, good health and wellbeing.”

Investors from the Netherlands, another country where ESG investing is very well advanced, were also quick to step up on euro denominated offerings.

APG Asset Management, which manages assets for some of the biggest Dutch pension funds, took 39 million euros of the European Investment Bank deal, and 34 million euros of the Council of Europe Development Bank's Covid-19 Response Social Inclusion Bond, as well as 16 million euros of the Nordic Investment Bank Response Bond. APG is already one of the world's largest green bond investors.

Issuance of social bonds out of Asia dates back to October 2018, when Korea Housing Finance Corporation (KHFC) made an offering backed by mortgages with a social aim. For example, certain loans support moderate to low-income households with an affordable mortgage loan and their first home purchase. The 500 million euro five-year deal was led by BNP Paribas, DBS Bank, ING and Societe Generale.

A new wave of deals is now expected out of Asia, and in early April the New Development Bank (set up by the BRIC countries - Brazil, Russia, India, China and South Africa) issued an 5 billion yuan three-year RMB Coronavirus Combating Bond in the China Interbank Bond Market. The proceeds will be used to support the Chinese Government in the financing of public health expenditure in Hubei, Guangdong and Henan provinces.

The final order book was in excess of 15 billion yuan. Around 54% of final allocations were to central banks/official institutions. ICBC was lead underwriter and bookrunner. Bank of China Limited, Agricultural Bank of China Limited and China Construction Bank Limited acted as the joint lead underwriters.

In Europe, issuance was already trending upwards before the corona crisis arrived.

In mid-February, Stuttgart based Landesbank Baden Wuerttemberg (LBBW) issued its second Social Bond. The 1 billion euro proceeds will be used for the financing/refinancing of basic infrastructure such as water, sewage, and public transport, and for access to essential services such as healthcare, social care and education.

The main buyers were funds and banks. According to LBBW, many investors who participated in the transaction also manage dedicated social/ESG funds or mandates. Overall, more than 44% of the allocation was placed to investors who are signatories of the UN Principles for Responsible Investment.

In early March the first Social Impact Bond was launched in Belgium, structured by BNP Paribas.

A Social Impact Bond (SIB) is a social financing mechanism which involves a Social Services Provider who is responsible for implementing the project and an Outcomes Payer who undertakes to pay back the investors if the project is successful in meeting its goals.

The small 1.7 million euro SIB finances Back On Track, the Oranjehuis programme working towards the reintegration of 133 young adults aged 17 to 25 in imminent risk of homelessness, by 2023. To achieve this objective, the organization will be using the Housing First for Youth system, a methodology that focuses first on access to sustainable housing for young people before beginning intensive and personalized support for their social and professional (re)integration. 

In France, back in Februry 2019, Caisse Francaise de Financement Local (Caffil) sold the first Social Covered Bonds from the SFIL Group, which was a 1 billion euro eight-year deal. Caffil is a big lender to French public hospitals.

SFIL can also issue social bonds directly, in addition to covered bonds. In the EU there are two main forms of covered bonds, those backed by loans to public sector entities, and those backed by mortgage loans for both residential and commercial property. 

SFIL Group, as the leading public sector covered bonds issuer in Europe, currently lends to over 1,000 public hospitals in France. It will thus be heavily involved in improving the French healthcare system, taking into account the deficiencies that were made clear by the corona crisis, and is likely to tap the market in the near future.

Already in 2017 Kommunalkredit in Austria sold a Social Covered Bond. And in late 2018 Deutsche Kreditbank (DKB) sold its inaugural public sector Sovered Covered Bond, a 500 million euro issue backed by loans to public sector entities. The deal for DKB, which is a subsidiary of BayernLB, was led by ABN Amro, BayernLB, Commerzbank, Credit Agricole and DZ Bank.

In spite of these offerings, in 2018 and 2019 social bonds lagged far behind the green bond market. That is now changing, and a large volume of global issuance is anticipated in 2020, while a growing number of institutional investors will be moving to strengthen their social bond frameworks, and put in place dedicated social bond portfolios.