The US Federal Reserve has set the tone: Interest rates will remain higher for longer. While this has helped drive growing interest for fixed income investments, retail investors were largely apathetic towards Singapore’s sovereign green bond, as seen from flagging demand for the Aug 24 reopening of an existing 50- year maiden note sold in August 2022.
The public offer saw a paltry subscription rate of just 0.08 times, according to issuance results released by the Monetary Authority of Singapore (MAS) on Aug 30. This is down from 1.06 times at last year’s inaugural offering.
While the institutional placement remained 1.43 times oversubscribed this round, the order book was down from 2.26 times at last year’s debut.
The reopened sovereign green bond, which matures on Aug 1, 2072, was priced to yield 3.04%. The final yield was 11 basis points (bps) tighter than the initial guidance of 3.15%. The effective yield reflects a coupon of 3% and an offer price of $99.26 per $100 in principal value.
Edmund Leong, head of group investment banking at United Overseas Bank U11 (UOB), cautions against a like-for-like comparison. “It’s important to view the 1.43 times subscription rate in the context of the larger placement tranche of $2.75 billion.”
MAS initially aimed to raise at least $1.8 billion before upsizing the issue to as much as $2.8 billion on Aug 24. Of the offer amount, $50 million was set aside for retail investors in a public offer that closed on Aug 29.
See also: Singapore's $2.8 bil green bond among growing sovereign offerings hawking ESG
“For this 2023 issuance, there was an order book of $3.9 billion for a $2.75 billion placement tranche,” Leong tells The Edge Singapore. “In comparison, for the 2022 issuance, the order book was $5.3 billion for a $2.35 billion placement tranche, giving a subscription rate of 2.26 times.”
He thinks this year’s combined placement order book of more than $3.9 billion “still reflects healthy institutional demand” for the 50-year Green Singapore Government Securities (Infrastructure) bonds, “albeit not to the tune of last year’s $5.3 billion order book size”.
To retail investors, however, the bond market has changed dramatically within a year.
See also: Singapore boosts green bond sale to as much as $2.8 bil
“The yield curve environment is significantly different,” says Leong. “While both the original deal and reopening were offered at the same yield of 3.04% p.a., in the same period last year, the Singapore Savings Bond (SSB) was paying an average yield of 2.80% p.a., whereas it’s paying an average yield of 3.06% p.a. recently.”
Tranches for the 10-year SSBs open monthly. The average interest rate for the latest tranche, which opened on Sept 4, has grown for the fourth consecutive time, reaching 3.16% from 3.06%.
The first-year interest rate for the latest SSB tranche is 3.05%, increasing to 3.48% at the 10-year mark. The total amount offered is $800 million.
Retail investors are likely to compare longer-dated instruments, like the 50-year sovereign green bond, against the SSB in their relative value assessments, says Leong.
Conversely, Singapore’s latest six-month Treasury bill (T-bill), which closed on Sept 28, posted a rate of 4.07%, up from 3.73% in the prior round, marking the first time yields have crossed 4% since January.
Interest rates from T-bills reached a 12-month high of 4.4% in December 2022, though this was still shy of the 5.52% record seen in September 1990.
Concerns over an economic slowdown, the higher interest rate environment and geopolitical tensions have affected bond activity across the board, says Clifford Lee, global head of fixed income at DBS Bank. “A better barometer for the health of the green bond market will be to look at green bond issuance volumes as a proportion of overall bond issuance volumes.”
Citing Bloomberg data, Lee says Apac (Asia Pacific) green league creditable bond issuance volumes in 2Q2023 grew to 4.45% of overall Apac league creditable bond issuance volumes, an improvement from 3.72% in 1Q2023.
The book-runners of the institutional placement of Singapore’s sovereign green bond were DBS, UOB, Overseas-Chinese Banking Corporation (OCBC), Citigroup Global Markets Singapore and Standard Chartered Bank (Singapore).
The three local banks also served as book-runners for the public offer. OCBC declined to comment on this story.
$700 mil invested in rail lines
Singapore plans to issue $35 billion of green bonds by 2030 to fund public-sector green infrastructure projects, as announced by Finance Minister Lawrence Wong at Budget 2022.
As of March 31, Singapore’s public sector has issued $8.2 billion of green bonds across four categories: Clean transportation, waste management, green building and sustainable water.
According to the Singapore Green Bond Framework published in June 2022, bond proceeds will fund projects classified as “nationally significant” under the Significant Infrastructure Government Loan Act, or Singa.
These projects should be controlled and legally owned by the government, cost at least $4 billion, last minimally for 50 years and support national productivity or Singapore’s economic, environmental or social sustainability.
Potential investments under Singa include projects in renewable energy, energy efficiency, green buildings, clean transportation, sustainable water and wastewater management, pollution prevention, climate change adaptation, biodiversity conservation, and sustainable management of natural resources and land use.
Examples include the upcoming Jurong Region Line (JRL) and Cross Island Line (CRL) in Singapore’s rail network.
The Ministry of Finance (MOF) allocated $700 million, or around 30% of the proceeds from its first green bond, to the two rail lines during FY2022 ended March 31 this year.
The remaining $1.7 billion is expected to be fully allocated to the JRL and CRL by the end of FY2024, according to the first edition of the Singapore Green Bond Report, released on Sept 21.
The JRL is scheduled to open in three stages from 2027 to 2029. Meanwhile, construction works for Phases 1 and 2 of the CRL are expected to be completed by 2030 and 2032, respectively, while engineering studies are ongoing for Phase 3, which will serve the Jurong Industrial Estate.
MOF commissioned Morningstar Sustainalytics to determine the impact of the investments from the green bond proceeds. When fully operational, the JRL and CRL are estimated to result in total carbon savings of between 100,000 and 120,000 tonnes of CO2 equivalent annually, equivalent to taking 22,000 cars off Singapore’s roads.
The expansion of the electric rail network is a “key enabler” to achieve Singapore’s “ambitious goal” of significantly reducing land transport emissions in absolute terms, in alignment with Singapore’s target to achieve net zero by 2050, says Indranee Rajah, Minister in the Prime Minister’s Office.
“The government is committed to a credible, high-quality framework for green bond issuance, and reporting is a key part of this endeavour,” says Indranee, the Second Minister for Finance and National Development and chair of the Green Bond Steering Committee.
Other structures available
Green bonds are just one of several structures available for Apac issuers to meet their climate goals, says DBS’s Lee. “Notably, issuers must find applicable green projects for green bonds to finance. Other structures, such as transition financing, blended financing and sustainability-linked bonds (SLB), complement green bonds in helping the Apac region decarbonise while enjoying sustainable economic growth.”
The region’s capital required for climate adaptation will be a tailwind for Apac green bond markets, adds Lee. “The region is more vulnerable to climate change risks than others due to its dependence on natural resources and agriculture and large populations living in locations prone to drought and flood, to name a few. This is even more pronounced for countries in Southeast Asia, with its many low-lying coastal cities and vulnerable infrastructure.”
A Moody’s report notes declining bond issuance in general and a lower number of firsttime sustainable bond issuers in 1H2023, owing to market conditions, heightened scrutiny around greenwashing and an increasingly complex ESG regulatory and political landscape.
UOB’s Leong remains optimistic. “We are confident that high-quality issuers, especially sovereign issuers, will uphold high standards in their ESG financing mandates, and that can trigger a flight to quality towards these issuers for ESG bond issuances.”
Chinese issuances, especially financial institutions with large pools of eligible assets like renewable energy assets, have consistently led Apac green bond issuance volumes, notes Lee, and he expects this trend to continue.
“In other parts of Apac, issuances from India, Indonesia and Korea are gathering momentum as these markets push for investments in renewables, decarbonisation and energy efficiency.”
By sector, governments and supranationals have historically been active issuers of green bonds, says Lee, as they finance capital-intensive infrastructure projects to mitigate climate change’s impacts and meet their environmental targets.
He adds that green bond issuers Within the private sector are mostly financial institutions, utility companies and REITs. “These capital-intensive businesses tap capital markets frequently, and the nature of their business enables them to easily identify green eligible assets or projects like renewable energy, green buildings and sustainable water management.”
Infographic: Ministry of Finance
