When France-based international water utility Saur priced a €550 million (US$595 million) 4.875% five-year public blue bond on October 16th, it was a first of its kind in Europe as well as a first for a water utility. Pretty remarkable given the ESG labelled bond market has been around for more than a decade. The bond signalled an acceleration of interest in blue bonds, i.e., bonds that specifically fund water-based projects.
As befits markets in the process of emerging, announcements of blue bonds are peppered with mentions of firsts. So when Mitsui O.S.K. Lines sold 10 billion yen (US$71 million) of 0.639% five-year domestic blue bonds in early 2024 under its Blue Action 2035 environmental strategy plan, it also claimed a world first – for the shipping industry. Marine and global environmental conservation, one of the plan’s goals, will see the company invest 650 billion yen between FY2023 and FY2025 with funds raised through blue bonds.
Ørsted, too, claimed a world first – for a renewable energy company – when the Danish issuer closed a €100 million 3.625% five-year blue private placement on World Ocean Day in June 2023. The transaction was anchored on the investor side by ABP, the pension fund for Dutch government and education employees. Proceeds were allocated to initiatives targeting offshore biodiversity (protecting and restoring marine and coastal biodiversity at-scale) and sustainable shipping (developing green ocean fuels to decarbonize ocean vessels).
Buyside interest
Rising interest in the blue theme was underscored this month by the launch of Fidelity Funds 2 Blue Transition Bond Fund, which Fidelity International reckons is a first of its kind. The fund is largely ramped up and invested in bonds (labelled and unlabelled) of issuers whose projects are aligned with the UN Sustainability Development Goals (SDGs) linked to ocean and freshwater goals. That means SDG 6 (“Clean water and sanitation: Ensure availability and sustainable management of water and sanitation for all”) and SDG 14 (“Life below water: Conserve and sustainably use the oceans, seas and marine resources for sustainable development”).
Both goals are heavily under-funded, however. Blue bonds have been around for years but have languished as a subset of green bonds. They need to emerge as their own segment to super-charge funding to protect the freshwater and ocean ecosystems.
A key milestone in the quest to burnish the credentials of blue bonds came just over year ago with “Bonds to Finance the Sustainable Blue Economy: A Practitioner’s Guide”, aimed at unlocking finance for a sustainable ocean economy. It was published jointly by the International Capital Market Association, International Finance Corporation, United Nations Global Compact, United Nations Environment Programme Finance Initiative and Asian Development Bank.
Ocean-focused
In a report published at the time of the Guide’s launch, KPMG referenced just 12 issues of blue bonds in the previous two years for just US$2.9 billion. What action there has been to-date has largely been in pursuit of SDG 14 and ocean-based projects. Recent blue bonds have emerged as components of sovereign debt-for-nature swaps, for example, where emerging market sovereigns have refinanced debt at lower cost in return for giving up some of the cost savings to fund nature conservation.
Deals with blue-bond components have emerged from Barbados, Belize, Ecuador, Gabon, and Seychelles, while Portugal agreed last year to swap the €140 million it is owed by Cabo Verde for investments in the African sovereign’s environmental and climate fund. Stand-alone ocean-focused blue bond issuance has come mainly from the sovereign, supranational and agency segment (e.g., ADB, Fiji, Kexim, Nordic Investment Bank, Palau, Seychelles and World Bank).
New heights
Corporate issuance has been slower to emerge. In the case of water companies, it’s not that they have avoided ESG-labelled bond issuance. In fact, over the last decade, 78% of the water industry’s US$41 billion in public international bond issuance (covering 27 issuers) has emerged in the form of green, sustainable or sustainability-linked bonds, according to Bond Radar data, most from European companies.
That could be about to change as Saur’s offering of recent days took the blue bond concept into new territory. It was not just a first for a European water utility but the first corporate blue bond issued in benchmark-size, i.e., in excess of €500 million. Previous public offerings have been smaller so they can be aligned with more modest project funding requirements or have come in private placement format with one or two investors involved.
Saur engaged with over 100 investors in pre-marketing and generated peak demand of €2.25 billion before the order book settled at €1.95 billion as pricing tightened from initial thoughts of 5.375%-5.50%. The depth of demand enabled the issuer to increase the size of the bond by 10% from the planned €500 million.
Net proceeds of the new bonds (the exact amount will be known after the tender for its 0.125% due 2025 €450 million sustainability-linked bonds has closed) will finance expenditures related to the water lifecycle, including water distribution, collection and treatment of wastewater, and desalination using technologies aimed at minimizing environmental impact.
