Twin bond structure highlights value of going green
Germany’s novel debt market concept offers lessons for Asian sovereign issuers
15 Mar 2021 | Bayani S. Cruz

Asian sovereigns should prioritize issuing green bonds as they are relatively cheaper for issuers while investors accord them a premium, based on the experience of the German government.

In a report issued last week, the Climate Bonds Initiative (CBI), an international investor-focused, not-for-profit organization, highlights Germany’s experience with the twin bond structure, which it introduced in September 2020. The novel concept involves issuing a conventional, or vanilla, bond (Bund) and a green bond, which share similar characteristics, within a short period.

Jorge Kukies, state secretary of Germany’s Finance Ministry, explained it thus: “Germany is introducing a new concept of ‘Green Twin Bonds’, where a green bond is issued with the same maturity and coupon as a conventional bond. The green bond is a separate bond with a smaller issue volume than the conventional bond. The aim of this structure is to ensure that the issuance of green bonds does not negatively influence the overall liquidity in German government bonds. It also makes it easier for there to be a natural diversification between conventional and green bond investors.”

Today, six months later, the “green twin bond” structure appears to hold long-term promise based on its lower pricing in the secondary market. “The green Bund priced with a greenium (1bp lower than the vanilla twin), and as of the end of 2020 had maintained consistently lower yields compared to its vanilla twin,” the CBI says.

The process actually began on June 17 2020 when the German Finance Agency (DMO) issued a five billion euro (US$5.6 billion) vanilla 10-year (Bund). This was subsequently reopened multiple times, reaching 30.5 billion euros (US$34 billion) by November 20 2020. On September 2, the DMO also offered a 6.5 billion euro (US$7 billion) green Bund that shared the same coupon and maturity as the vanilla one.

The only difference is the use of the green bond proceeds, for which five sectors have been identified: transport; international cooperation; research, innovation and awareness raising; energy and industry; and agriculture, forestry, natural landscapes and biodiversity.

“The DMO has termed this the ‘green twin’. In effect this is a non-fungible tranche that will continue to maintain a separate identifier until maturity,” according to CBI. “Historically, secondary market bond data tends to be unreliable, limiting analysis of the volatility in the green bond market. However, a large, liquid government bond with a green ‘twin’ is the dream case study. Both bonds trade actively in the secondary market, thus the prices reflect actual transactions. This enables us to draw more meaningful conclusions from the results.”

The novel structure demonstrates that the German Bund “priced with a greenium (premium between vanilla bond and green bond), maintained a lower yield in the secondary market and exhibited lower volatility compared to its vanilla twin”.

The report concludes: “Governments should be encouraged to prioritize green expenditure, knowing it is relatively cheaper, and investors should commit more capital to green mandates.”

In Asia, issuers such as the Export-Import Bank of Korea (Kexim) have also issued vanilla bonds and green bonds at the same time, but not using the “green twin bond” structure used by Germany.  In April 20 2020,  Kexim successfully priced its US$700 million three-year floating rate note (FRN) and 700 million euro green five-year FXD dual currency notes.