Last week the Spanish Treasury made its debut in green debt issuance. However, the autonomous communities are ahead of the pack. In fact, these regions have taken advantage of the recent appetite for this type of debt to finance themselves at favourable rates and, in the process, reduce their dependence on central government financing.
As told in an analyis of Scope Ratings, sovereign lending became the primary funding source for Spanish regions as the euro area debt crisis hampered access to capital markets. In recent years, regions meeting fiscal targets set by the central government have gradually returned to capital markets to substitute part of the debt owed to the central government and to benefit from declining interest costs.
Indeed, last year marked the first time that the aggregate regional sector share of debt owed to the central government fell, declining to 58.9% from 61.1% in 2019. The amount of debt raised using state funding has also fallen for the first time in absolute terms to EUR 178.9bn in 2020 from EUR 180.2bn in 2019.
The growing capital market awareness of social and environment credentials, a strong political focus in the EU on measures to mitigate the economic and social impact of the coronavirus pandemic, and the long-term declining trend of interest costs all represent an opportunity for Spanish regions to tap into growing investor demand for ESG-linked bonds.
Issuing these sorts of securities offer a way to tap a larger pool of investors and attract new sources of capital as well as locking in low funding costs for the regions to contain the expense of more autonomous funding compared with reliance on borrowing from central government.
A handful of pioneering Spanish region have taken advantage of these favourable circumstances. Madrid, the Basque Country and Andalusia have come to market this year, raising so far an aggregate EUR 3.5bn in ESG-linked bonds, following issues from Madrid, Navarra, Galicia and the Basque Country in 2020 worth about EUR 4bn.
“These debt instruments could sustainably supplement the future financing mix of Spanish regions,” says Jakob Suwalski, director at Scope.
“Still, additional incentives are necessary until Spanish regions’ green, social and sustainability bonds reach market maturity, for example via a new sector standard for environmental and social reporting, given that the proceeds of the bonds have to cover the increased reporting and monitoring costs involved,” Suwalski says. There is little to prevent the regions from financing environmental or sustainable investments with conventional financial instruments.
“While the regions now face greater investor scrutiny on what their sustainability policies and projects are, the shift should promote greater focus on long-term budget issues and indirectly support their long-term strategic planning and budgeting,” says Suwalski.