A $4.59 billion-asset bank in Maryland may establish a template for other small and midsize banks seeking to tap into sustainability-oriented investors and help fund the climate transition.
The bank, Forbright Inc., completed the placement of the $125 million green bond in December 2021 — a first for a U.S. bank with less than $150 billion of assets. Forbright plans to allocate an amount equal to the proceeds of the bond to finance solar power and energy efficiency projects within 12 months, and report at least annually on the use of proceeds.
Community banks can struggle to access capital markets at the same pricing and availability as their larger peers. Among the more than 550 publicly traded banks with less than $10 billion in total assets, only two have issuer credit ratings from S&P Global Ratings. By pursuing a green bond, banks can attract investors focused on environmental, social and governance issues who might have been less interested in funding debt for general corporate purposes.
“We had more investors in the process, more investors sort of asking questions than maybe the traditional bank sub-debt process would see,” said Aaron Juda, chief strategy officer at Forbright, in an interview.
Sustainable bonds generally allow issuers to reach a broader and more diverse base of investors, said Lori Shapiro, a sustainable finance analyst at S&P Global Ratings.
“There is evidence that many sustainable bonds issued in the last few years have been oversubscribed at higher levels compared to their vanilla counterparts,” Shapiro said in an emailed comment.
Not only do green bonds, or debt earmarked to finance environmentally friendly projects in renewable energy and the like, allow community banks to market their debt to a group of investors who might not consider buying otherwise, that group of investors is growing rapidly. Moody’s ESG Solutions has forecast that issuance will hit $775 billion this year, with a broader universe of mission-oriented debt that includes social and sustainability bonds rising to 15% of total bond issuance globally, up from 6.7% in 2020.
“Rising investor demand for labelled bonds, greater incorporation of ESG and sustainability factors into investor portfolios” are supporting expectations for “growth in issuance across the board,” said Matt Kuchtyak, vice president for sustainable finance at Moody’s ESG Solutions.
Green bonds can garner advantageous pricing and broaden the investor base for an issuer, said Matt Resch, managing director of M&A and capital markets for PNC Financial Services Group Inc.’s financial institutions advisory group. PNC issued its own inaugural green bond in 2019, and it was one of the placement agents for the Forbright green bond, and its ESG structuring agent. Resch said there are several clients in the pipeline contemplating a green bond similar to Forbright’s.
“As more and more investors have specific ESG mandates to buy sustainable investments, that just expands the universe of prospective investors,” Resch said.
Analysts at BofA Global Research estimated that yields on green bonds ranged from 2 basis points to 5 basis points lower than conventional bonds for investment-grade issuers in Europe over the 18 months through January.
“Labelled bonds tend to appeal to a wider (and growing) investor audience, which can increase demand and potentially shave a few basis points off of debt costs,” they said in a note on Jan. 31. “Labels also highlight a green or social approach to investment, which can be positive for marketing.”
The yield advantage may erode as green bonds saturate the market in a particular sector, however. The BofA Global analysts found that it largely disappeared for European utilities, for which green bonds account for about 35.5% of total issuance in the European investment-grade index.
And while green bonds represent a large, growing sector, U.S. banks — especially community banks — have not been particularly active yet. So far, European entities, including sovereigns, have dominated issuance. In the U.S. banking sector, a relatively small group mostly comprising the largest institutions — including Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. — have sold green, social and sustainability bonds.
“The U.S. is still more in the infancy stage, specifically in the depository space,” Resch said.
Smaller banks may face hurdles accessing these ESG markets because of factors such as limited name recognition and resources to focus on ESG initiatives, said Rian Pressman, a financial institutions credit analyst at S&P Global Ratings.
Forbright, formerly Congressional Bancshares Inc., rebranded itself in 2021 and pledged to dedicate half its assets to financing clients focused on sustainability and decarbonization. Forbright’s $125 million green bond adds to more than $350 million it has raised over the past year in private placements of common equity to investors including funds managed by BlackRock Inc. and Centerbridge Partners LP. John Delaney, a former Democratic congressman and presidential contender, and an industry veteran, is chairman and CEO of the holding company and executive chairman of the bank.
Forbright is growing rapidly, and needs disproportionate growth in sustainable finance to reach its target for such assets to make up 50% of its total, Juda said. The bank has no immediate plans to issue another green bond but would consider it in the future, he added.
Beyond the additional funds, green bonds can provide qualitative benefits to banks by helping them formalize and document socially responsible funding activities, said Kristi Eberhardt, head of PNC’s sustainable finance practice.
“Telling your story over and over again is extremely important. It’s extremely important for stakeholders to hear it,” she said. “We continue to hear how investors are asking more and more nonfinancial questions.”
Source: spglobal.com