not as controversial as it seems

De Volksbank on Tuesday appointed officials to organize what could be the green-labeled second additional tier (AT1) of a European bank, two years after BBVA sold the first.

Although BBVA has shown that such a deal can be done, questions have been raised about the real feasibility of a green-labeled perpetual capital instrument, which hampers the monitoring of the issue. However, as more companies move toward net zero and investors become comfortable with green debt elsewhere in the capital stack, the argument for greening lower segments strengthens.

An AT1 is the most deeply subordinated bond a bank can issue, ranking just above its common stock layer. And therefore, in the event of a resolve, convert, or depreciate event, he is second in the line of fire.

There are fears that the insolvency of this debt will sever its connection to the underlying green assets. Investors bound by green mandates are unlikely to be happy with the green capital they have put in place to bail out brown assets.

But this is not limited to AT1 bonds, with senior and Tier 2 bail-in bonds containing similar loss-absorbing characteristics. These asset classes themselves are already incredibly popular with green lenders – bail-in or Tier 2 transactions accounted for 29 of the 43 ESG-labeled bank bonds publicly issued in euros this year, according to GlobalCapital.

Labeled debt issued in these formats is already treated on a par with conventional bonds when it comes to absorbing losses – so why not AT1s?

What De Volksbank is offering is a normal AT1 whose use of proceeds is earmarked for green projects – including perhaps some projects it could have funded anyway with a conventional AT1 instrument.

As long as brown and green asset pools coexist, investors will worry about the perpetual nature of a green-labeled product. A bank is unlikely to have green assets on its balance sheet that would require funding in perpetuity.

However, even then, the maturity of most green asset pools does not always match the maturity of a bond on an individual basis, forcing the bank to either refinance with a new bond or refresh its pool. of assets. The duration of a bond is often a careful balance between the asset and liability management needs of the issuer and the desires of the investor base.

Of course, there is always the risk with a perpetual instrument that the bond will not be called, with the outcome of such an event extending the bank’s green funding commitment for eternity.

But the Dutch lender has committed to 100% green finance by 2030 – it will eventually issue green finance AT1 debt by then anyway. And other banks are on similar paths toward their own net zero goals.

More than 110 banks around the world have pledged to align their balance sheets with net-zero emissions targets by 2050, with many setting their own targets even earlier.

For a company like De Volksbank with its ambitious 2030 target, the stronger the commitment to net zero, the more credible a green labeled AT1 becomes: green mandates won’t have to worry about post-call revenue not funding green assets.

Of course, there are still sticking points over what exactly is a green asset. What is green today may not be so in a few years.

It has happened before. The EU Green Taxonomy has decided that financing formerly green low-emission vehicles would no longer be considered a sustainable or appropriate investment after 2025, only zero-emission vehicles being permitted.

While there are risks that other assets will follow suit, any change in their classification is unlikely to happen overnight.

Worried investors might look to what happened with capital instruments issued before the EU agreed to the rigidly defined Capital Requirements Regulation (CRR) in 2013. These legacy agreements have been protected for nearly nine years, giving banks plenty of time to mop up their capital. Battery.

De Volksbank’s roadshow has so far generated strong interest not only among subordinate debt specialists, but also among ESG-focused accounts. Aside from BBVA’s foray two years ago, these investors have had virtually no opportunity to invest in lucrative AT1 debt, and have instead been limited to Tier 2 and senior bank papers.

But if those accounts are already content to take the risk with Tier 2 debt or bail-in debt, and are comfortable with the green pledge, then it’s time to push banks to step up. next and print green labeled AT1s.

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