Globally, green bonds are booming. The instruments accounted
for $40 billion in new issuance in 2015, following years of
rapid growth, according to OECD calculations. Yet Latin America
is sitting out the frenzy.
"We found a market failure on financing energy efficiency in
Mexico," says Maria Tapia, a lead investment officer at the
Inter-American Investment Corporation (IIC). "There is a
lack of available financing."
Energia Eolica, a Peruvian windfarm operator, was the first
Latin American company to issue a green bond in the
cross-border market with a $204 million transaction in
December 2014. Since then, only six trades have followed.
That’s in part because many
environmentally-friendly projects in Latin America need less
capital than can be comfortably financed in the global bond
markets. Weak credit ratings at potential issuers also hinder
access to the growing pools of capital directed at green
In the US and Europe, green bonds took flight through issues
from supranational agencies, says Suzanne Buchta, a managing
director and the head of green bonds at Bank of America Merrill
"To get off the ground, investors shied towards entities
with higher credit ratings," she says. "The growth now comes
out of emerging markets, so it’s about getting the
word out about green bonds and increasing investor demand for
Although Latin America’s first green bond came
from a Peruvian issuer, now Mexico is leading the way in the
It’s there that the IIC is hoping to address
the dual concerns of size and creditworthiness with a
securitization program. If the trial goes well in Mexico, it
may roll it out to other parts of Latin America.
"Banks don’t accept financing an energy
efficiency project based on the benefits of energy savings,"
Tapia says, adding that such projects are often far smaller
than the 300-megawatt size that is an unofficial benchmark for
attracting financing from commercial banks or other
private-sector investors. "So for us to correct this, we chose
to look at green bonds."
The IIC is establishing a pool of energy efficiency projects
that qualify under the Green Bond Principles, guidelines set
forth by the International Capital Markets Association. Once
this is ready, a special-purpose vehicle will issue an
IIC-backed green bond.
"When we go out to the market, we want to achieve the AAA
rating and be labeled green," Tapia says. "The idea is to
create a capital markets solution to encourage the private
sector to tap the green bond market."
The pilot securitization in Mexico is poised to launch this
year. Tapia hopes the transparency in international capital
markets will heighten the awareness and merits of such a
"What is clear is that there is a pool of green climate
funds out there," she says. "We’ve received
inquiries about how to reach those funds, so we’re
trying to develop a structure to offer these funds to
Another advance in environment financing came in September,
when the New International Airport for Mexico City (NAICM)
issued a $2 billion cross-border green bond. The
transaction signaled not just a shift in investor
perceptions toward socially responsible securities but also an
innovative means of structuring green bonds.
Half of the transaction had a 20-year tenor, the longest
ever for a green security. Despite that unprecedented feature,
investors lunged for the paper, putting in orders for $4
billion of debt — the largest-ever order book for a
Latin American green bond.
The borrower pulled out all the stops to make the deal as
attractive as possible, says Mike Fitzgerald, a partner at law
firm Paul Hastings. In particular, despite being a
quasi-project-finance deal, it featured no construction risk.
Rather, receivables from the existing airport have been
channeled through a trust to pay for the expansion
"This financing mechanism is intended to straddle both
[airports] through these charges that are placed in a trust,"
he says. "It was a little unusual; because of the size, [NAICM]
wanted to have the largest appeal to the most-available kinds
of financings worldwide."
By structuring the transaction in line with the Green Bond
Principles, NAICM opened itself up to an investor base
dedicated to socially responsible investments.
"From an economic approach, you want to make sure your deal
is structured in such a way so it has access to these pools of
capital," Fitzgerald says. "This was a first for an airport,
and with access to as many pools as possible, it gets the best
Green bond opportunity: Banco Nacional de
When Banco Nacional de Costa Rica looked at issuing a
bond last year, the green bond format was not on the
table. It wasn’t until Bank of America
Merrill Lynch pointed out that 60% of the proceeds
from the borrower’s previous
cross-border bond supported energy efficiency
projects that it began considering the format,
BNCR’s deputy general manager Bernardo
"Our intentions were to issue vanilla 144A-type bonds
and replace some of our short-term funding for green
projects and support new projects that were under
analysis," he says.
But with more energy efficiency projects ahead,
Alfaro was enticed to study the Green Bond
Principles. With a push from its relationship banks,
BNCR issued a $500 million 2021 green bond, opening
itself up to new investors in the process, says
"During the investor road show, we were able to reach
places that we would not have reached otherwise, like
Switzerland and Germany."
BNCR’s green bond had a new-issue
premium of just 10 basis points, and bookrunners BAML
and JPMorgan tightened spreads significantly on the
day of issue, Carlos-Ivan Lopez, BAML’s
head of debt capital markets for Latin America, says.
"You can’t guarantee this kind of
squeeze to issuers, but we have seen precedents in
the US market where multitranche deals, with one
green portion [the green tranche] ends up with a
lower new-issue premium," he says.
NAICM’s use of environmentally friendly
materials to build one of Latin America’s busiest
airports allowed it to conform to the Green Bond Principles.
The airport will be powered by clean energy and incorporate a
water reuse system, says Kurt Vogt, a managing director for
sustainable finance at HSBC, the green structuring advisor on
Even for carbon-emitting industries, such as airports or
paper-exporting firms, there are ways to invest in clean
energy, he says.
"For a corporation transitioning into low carbon, they can
invest in alternative fuels, or water, to make operations more
efficient," Vogt adds. "By doing that, the company has an
opportunity to talk about it to investors, and investors, in
turn, care about social and environmental governance."
The Central American Bank for Economic Integration is one
potential borrower attracted to green bonds by the opportunity
to highlight its commitment to combating climate
"There are investors that are now only looking at your green
aspects," says Ricardo Rico, the head of capital and financial
markets at the A1/A/A-rated development bank, who says his team
already has the documentation in place for such a deal. "You
have to demonstrate to investors that you are seriously
committed to green."
Growing buyer base
The depth of appetite shown by the airport transaction may
herald a busier future for green bond deals in Mexico and
beyond. Three-quarters of investors in the Americas are
planning to increase their low-carbon investments in the coming
years, says Vogt.
"They are driven by pressures from different stakeholders,"
he says. "They have pressures from depositors such as pension
funds that think about climate change and money as a catalyst
to deal with it."
HSBC’s Vogt says the largest barrier for growth
is "the lack of credible opportunities" in Latin America. He
also marks green bonds’ lack of transparency as an
area of concern.
"What is missing is proper disclosure and understanding what
the risks are and how they are measured," Vogt says. "Without
that, investors can’t be sure of what they are
investing in and whether or not anything is being done to
reduce risk in an adequate manner."
Gema Sacristán, chief investment officer at the IIC,
says investment-grade multilateral agencies can assume
construction risk on green-oriented projects, alleviating some
"If we take a really big role at the beginning of a project
by taking construction risk, then later on, once the project is
done, we could refinance this in the capital markets," she
says. "Once the project is completed, then you have a steady
generation of cash flow."
The IIC’s Tapia says banks must convince
issuers that green bonds bring benefits to investors. She also
says the banks play a key role in compelling institutional
investors to view energy efficiency portfolios and putting
investors in a position to take risks on companies seeking
"It’s about educating investors and creating a
tool to analyze the risks in a portfolio related to climate
change," Tapia says.
Under the Green Bond Principles, an issuer must ring-fence
their proceeds to qualify for a green note. The borrower must
also describe how it chooses the projects being financed and
their environmental impact.
Proponents describe green bonds as a win-win for issuers and
investors: Borrowers can tap into pools of green capital, and
buyers can tout their sustainable investments. But some
investors want to see green bonds really stand apart.
"Unless you are an investor that particularly wants it in
your portfolio, then it makes no difference to buy a bond that
is green or not," says Edgardo Sternberg, a co-portfolio
manager at Loomis, Sayles & Company. "There is no price
difference and no incentive."
What’s more, with green bonds still a rarity,
measuring value is tough, he says.
"Like anything new in Latin America, the question is what to
trade green bonds for, and what are you comparing them to?"
Sternberg says. "If you buy green, you are likely to hold them
for a while because there is no price discovery or benchmark in
the Latin American space."
Jason Trujillo, a senior analyst at Invesco, says such bonds
don't merit better pricing for the borrower.
"I don't think you see people looking at green bonds and
broadly thinking that they are any different," he says.
"[Issuers] should not expect a materially better yield than if
they were to issue a non-green bond."
Alex Rau, a principal and director at green bond advisory
firm Climate Wedge, says that, over time, the pricing dynamics
should change as the market grows.
"The market is just not big enough yet for a lot of
investors to shift their portfolio off to green instruments,"
Rau says. "In the longer term, I believe there will be a slight
price premium. The trends are favorable but not quite there
Still, for some borrowers, any chance to broaden the
investor base is welcome.
Paul Hastings’ Fitzgerald says currency
fluctuation and geopolitics have left a wave of uncertainty
around Latin American investments. And as long as that
uncertainty exists, bond issuers must address the need to build
a diverse order book, he says.
"Green bonds provide another attractive means of financing,"
he says. "The greater the availability these dedicated pools of
capital become, then the better things get in terms of pricing
Meanwhile, opinions still vary over what should constitute
an environmentally friendly use of the proceeds, says
"Take energy efficiency measures at a coal-fired power
plant," he says. "You may be making it greener, but
it’s still not green — its power source
is not always environmentally friendly.
"Measures are open to debate, but what’s
important is ring-fencing the proceeds. It makes sure funds are
going to green investments only."
ICMA’s Green Bond Principles are the base, but
Rau says the standards and definition over what constitutes a
green bond must improve.
"Some questions have not been ironed out, but we are in a
growth period for the green market," he says. "In the long
term, standards need to ensure that green bonds’
overall market integrity is not