Crèdit Agricole - Requalification of outstanding bonds into green bonds

On the 25th April 2022, the Spanish company MERLIN Properties announced the launch of its new green financing program, which aims at converting all its outstanding senior bonds, representing an aggregate principal amount of more than € 4.0bn, into “green bonds”. This launch follows two successful similar operations that occurred recently. Indeed, the French real estate company Gecina had opened the door to this innovative process back in April 2021 when it converted its € 5.6bn outstanding conventional bonds into green bonds. It has been followed in early 2022 by Spanish Group Colonial which converted its € 4.6bn outstanding issues into green bonds, which included those of the Société Foncière Lyonnaise (SFL), its French subsidiary. Notably, CA-CIB acted as sole bank advisor on these three operations, which positions the bank as the leading entity on bond green requalification exercises.

The road to requalification

How does this work in practice? First step is the structuration of a green financing framework, which is the backbone document of the buildings relabeling as “green”. As a matter of fact, this document, which is the basis for the requalification and the issuance of green debt products going forward may incorporate enough flexibility over time. That’s why Gecina, Colonial and MERLIN included in the buildings eligibility criteria carbon emissions trajectory which decrease over time. When ready, the issuer launches a consent solicitation exercise, asking its bondholders to accept that proceeds will be allocated to the financing or refinancing of a portfolio of eligible green assets. This change in the use of proceeds definition is the only amendment in the documentation. It implies to convince investors to support the requalification and vote in favor at the General Meetings.

The requalification of Gecina’s 15 outstanding issues as Green Bonds was submitted for approval by note holders. Over 90% of investors who voted approved this program.

Aligning financings with ambitious ESG strategy

By launching such a financing program, issuers intend to put in coherence their ESG roadmap with the color of their financings. As an illustration, MERLIN started the conversion the week after it presented its “Pathway to Net Zero” plan, which sets out its roadmap to become at net zero emissions company by 2030. Similarly, Colonial and SFL target a carbon neutral portfolio by 2050. Requalification is thus more an ESG rather than a financial process. Pascale Forde-Maurice, head of CA-CIB Sustainable Banking activity for European Corporates, considers that “this process does not imply new money for investors. It therefore enables issuers to focus their dialogue with investors on ESG roadmaps”. The idea is to have an integrated approach on the way ESG strategy is monitored by the company. Ambition is also ensured going through the second-party opinion process. As part of any classic green financing framework structuring process, an external reviewer assesses the framework’s alignment both with market guidelines and the issuer’s sustainability strategy. It also opines on the eligibility criteria level of ambition. This provides comfort to investor that may fear greenwashing. The need for science-based carbon trajectories is also a widespread expectation which backs the framework’s contribution to climate change mitigation. Increasingly stringent regulation, such as EU Taxonomy, is also a major incentivizer to bonds requalification, both on corporate issuers and investors side, which are required to communicate on the greenness of their activities and portfolio respectively.

Going forward

These innovative conversions are only burgeoning. Indeed, for the time being it has been limited to the Real Estate industry, whose business relies on green assets and appears as a natural candidate for such innovations. In the future, pure players from other sectors may seek to replicate the concept and contribute to make green financing the new standard going forward.

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