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June 9, 2022updated 15 Jun 2022 10:48am

Breaking down the world’s biggest green corporate bond

Dutch transmission system operator Tennet accelerated its push into renewable energy with a €3.85bn green bond notable for more than just its size. Capital Monitor spoke to the company's head of treasury.

By Adrian Murdoch

Wind power forms a growing share of Tennet’s energy mix. (Photo by Daniel Rodrigues/Bloomberg via Getty Images)
  • In late May, Dutch transmission system operator Tennet sold a four-part €3.85bn ($4.1bn) green bond, the largest ever from a corporate and the first 20-year corporate euro bond since October.
  • The deal underlines Tennet’s commitment to the energy transition, with proceeds due to be used both onshore and offshore to invest in green power in transmission projects in the Netherlands and Germany.
  • By mid-May Germany had cut the Russian share of its oil imports from 35% last year to 12% and its coal imports from around 50% to 8%, according to Deutsche Bank.

The energy sector often captures the headlines for the wrong reasons. At the end of last month a consultant for Shell announced that she had cut all ties with the oil major after 11 years because of what she called the group’s “disregard for climate change risks”. In a widely circulated post on LinkedIn, Caroline Dennett said: “I can no longer work for a company that ignores all the alarms and dismisses the risks of climate change and ecological collapse.”

Her declaration came as Shell’s shareholders approved its climate strategy to achieve net-zero emissions by 2050 – a pledge seen by some investors, such as the Church of England Pensions Board, as not very credible. What’s more, Shell continues to appeal a Dutch court ruling – its last appeal was filed on 22 March – that it is responsible for the emissions generated by its customers, under Scope 3.

Yet there are companies in the energy sector that have been rather more proactive in addressing the challenges of the transition.

Take Dutch government-owned Tennet, Europe’s first cross-border transmission system operator, which supplies electricity to 42 million people across the Netherlands and Germany. On 22 May it sold Europe’s largest corporate green bond to date: a €3.85bn ($4.1bn) four-part deal.

The deal, which comfortably beat the previous record set by French utility Engie in April 2014 with its €2.5bn two-part deal (see chart below), reflects Tennet’s long commitment to climate transition. The transaction will accelerate Tennet’s push into renewable energy and included the first 20-year tranche to a European green bond ever. In fact, it was the first 20-year tranche on a European corporate bond for seven months.

“We were convinced that with our profile, credit rating and ownership structure we would be able to reopen the 20-year market again with our transaction,” head of treasury Gerard Kits tells Capital Monitor.

Tennet has sold €16.7bn in green bonds since 2015 to invest in the transition, and 90% of the Arnhem-based company’s debt is now green across a variety of formats, Kits says. On top of green bonds, the group has raised €2.2bn in the green hybrid market, €500m in the green US private placement market and €1bn in the green Schuldschein market, a German debt certificate that is treated like a bond.

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With the help of such moves, the company has dramatically increased the green proportion of its energy mix to 69% last year from 27.4% in 2019.

A natural fit

Tennet’s shift into green fundraising began in 2015, Kits tells Capital Monitor, because he saw “a fit with what we were doing as a company at that time”.

For instance, the company was already investing in offshore wind connections in Germany. At that time Tennet had three offshore projects in its portfolio: Germany’s first wind farm, the 62MW Alpha Ventus project off the coast of Borkum, and the BorWin 1 and BorWin 2 400MW and 800MW wind farms off the coast of Diele. The group’s portfolio has grown since then and it now has around 40 projects off Germany and the Netherlands.

Proceeds of the latest bond, as the group’s green financing framework makes clear, will be used to invest in green power transmission projects in Germany and the Netherlands – specifically those that connect large-scale offshore wind farms to the onshore electricity grid.

In its second-party opinion, ISS says the group “shows a high sustainability performance against the industry peer group” and confirms that the group’s plans align with the International Capital Market Association’s green bond principles and the EU's taxonomy of sustainable activities.

In mid-March Tennet said it would increase its investment in the expansion and maintenance of its grids from €4bn in 2021 to a minimal annual investment of €6bn by 2025 to help with the energy transition.

A typical recent deal that will benefit from funding from the bond include the onshore cable connection contract that Tennet awarded to the NRG consortium of construction groups Denys, Alsema and Van Vulpen in mid-May to link the 700MW Hollandse Kust wind farm and the transformer station in Wijk aan Zee in the Netherlands.

Gerard Kits, head of treasury at Tennet, says the company's move into green bond issuance in 2015 was a natural fit with its activities. (Photo courtesy of Tennet)

Onshore and offshore

While Tennet is increasingly well-known for offshore transmission links, the company also works onshore, and proceeds from the bond may also be used on the onshore grid to help boost the transmission of renewable energy.

Kits cites Tennet’s 700km underground SuedLink connection in Germany from Schleswig-Holstein in the north to Bavaria and Baden-Württemberg in the south, which it is building alongside German transmission grid operator TransnetBW. The largest infrastructure project of Germany’s transition – indeed the longest underground power cable in the world, set to cost an estimated €10bn – SuedLink is expected to complete in 2026.

Full details of how the funds have been used are detailed in Tennet’s annual report.

The issue was split into a €1.25bn 1.625% 4.5-year tranche; a €1bn 2.125% 7.5-year tranche; a €750m 2.375% 11-year tranche; and a €850m 2.750% portion out to 20 years.

Procter & Gamble was the last corporate to sell a 20-year euro bond since October, with only governments issuing euro-denominated debt of that maturity in the past few months. The EU, for example, sold a €6bn 1.25% 2043 issue in April, and Austria went even further with a €4bn 1.85% deal maturing in 2049 at the very end of May. Both are green bonds.

Big investor interest

During bookbuilding, demand for the green bond peaked at €9.7bn, which allowed Tennet to tighten spreads across all four tranches by between 15 and 27 basis points (bp). Demand was a result of both familiarity with the name and an understanding of the green bond structure, Kits says. “Everyone understands our framework, and our position both in the financial markets but also in the energy transition.”

Holland’s Triodos Investment Management (with €6.4bn under management), for example, says it is invested in Tennet debt because it “explicitly confirms” that the company’s activities contribute to Sustainable Development Goals 7 (access to affordable and sustainable energy) and 13 (combating climate change).

During calls ahead of the deal, investors generally were asking nuanced and mature questions on the importance of energy transition, especially in the current geopolitical climate, and on the EU Taxonomy, says Arthur Krebbers, head of corporate climate and ESG capital markets at British investment bank NatWest Markets, one of the leads on the deal as well as the sustainability adviser.

Whereas such sessions often resemble green bond 101 classes run by the issuer and arranging banks, Krebbers says in this case he had seen a “real educational improvement” among investors around financing the climate transition.

While he would not disclose the investor breakdown, he says the green bond was placed with “reliable buy-and-hold accounts”.

Outlook bright, with some clouds

However, while Tennet is investment-grade – rated A3 by S&P and A- by Moody’s – there are potential clouds on the horizon. Berlin-based Scope Ratings warns of possible credit rating downgrades because of the company’s growing capital expenditure and associated external funding needs.

Nonetheless, Kits indicates that Tennet is unlikely to be diverted either from its funding programme or its determination to develop a fossil-free energy system by 2045.

On top of this, the move towards renewables in Germany and the Netherlands has been given added impetus by those countries’ desire to wean themselves off Russian oil and gas following Vladimir Putin’s invasion of Ukraine. By mid-May, Germany had cut the Russian share of its oil imports from 35% last year to 12% and of its coal imports from around 50% to 8%, according to Deutsche Bank.

“We have a lot of room to issue new green bonds in the future,” says Kits. Given Tennet’s clear strategy around how it uses the proceeds from such issuance, that bodes well for renewables’ continued rise.

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