Following the launch of the OAT 2039 Green Repack, a repackaging of the first green OAT (Treasury notes with annual coupons) issued by Agence France Tresor and hedged by Natixis, SRP spoke to Selim Mehrez, managing director, global head of fixed income and Orith Azoluay (pictured), global head of green and sustainable finance, about the bank's plans to leverage its structuring capabilities to repackage debt and respond to increasing demand for green structured investment solutions by institutional investors.
Technically speaking, the note is a standalone issue structured via SPV and aims at creating a synthetic debt not directly available in the markets with a callable feature sold by the investor to Natixis Special Purpose Vehicle (SPV), known as "Purple", according to Mehrez (below).
"A far as we know, this is the first green structured note we see in the market, and this was confirmed by several market players we discussed this topic with (rating agencies, green assessment agencies...)," said Mehrez. "The investor thus benefits from a yield pick-up alongside a reduced duration due to this optionality. The call option is at the hand of the issuer and the investor thus bears the re-investment risk in case of early exercise. Also, the investor is exposed to a higher rates environment as for any fixed-rate investment."
The capital is entirely guaranteed and the note benefits from a favourable IFRS & Solvency II treatment and easy operational management as margin calls are outsourced between Natixis and Purple SPV, according to Mehrez. "This is a very usual repackaging structure," said Mehrez. "The main innovation lies in the fact that the note is a 100% green investment that benefits from a second party opinion from Vigeo Eiris, the extra-financial rating agency that already provided the second opinion on the OAT 2039 itself. The Green Bond Principle features of the notes' collateral remain unchanged through this structure. Purple commits to provide investors in the Green repack with all available information especially any green bond reporting documents published by the AFT."
For this kind of repack format, the French bank is only targeting institutional investors (mostly insurers and asset managers), and is looking at several corporate and supra issuances "which should be of interest for some of our clients", according to Mehrez.
"The French OAT has been chosen because this is the most liquid bond issue in the Green area issued so far," said Mehrez, noting that liquidity is key for this deal due to the optional callability of the structure (there's an option market on OATs) and ease the buying process as there is a secondary market. "Furthermore, this underlying perfectly fits with the clients' targeted (insurance companies, asset-managers) as they are very familiar with the OAT and looking at long tenor, in the meantime, this tenor allows to set-up an interesting pick-up."
The bank is seeking to leverage its structuring capabilities to expand the range and respond to demand from investors, according to Mehrez. "Similar structures can be easily reproduced, with any kind of green underlying," said Mehrez. "For example, if you remove the callability feature, you can perfectly repack a less liquid issuance. This is clearly the first in a series of green products we are aiming to develop."
The bank is "utterly convinced" that there is an increasing traction for new structures in the green segment of the market "as this first transaction shows", according to Mehrez. "We are currently receiving a lot of positive feedbacks from our traditional structured products' clients but also gathering interests from pure green and socially responsible investing (SRI) investors not necessarily familiar with SPV structures."
These kind of structured green notes will likely support the development of the green market by enhancing secondary liquidity on issuances, which is often seen as one of the main burden on this market, by diversifying products (and yield pick-up potential) offered to existing buyers of green bonds, and by diversifying further the green bond investor base (by the way a repack can of course be sold on primary market issuances ) and educate "mainstream fixed income structured products investors" to green underlyings, and further feed "greening assets" strategies of a number of institutional investors (especially insurers, typical buyers of repack formats), according to Azoluay, who heads the bank's Green & Sustainable Hub within the Corporate & Investment Banking (CIB) division, launched in 2017.
Natixis Green & Sustainable Hub is aimed at stepping up its green and sustainable economy ambitions by providing issuer and investor clients globally a new operational platform with a 'broad spectrum of green and sustainable finance expertise'.
This conviction is deeply rooted in our 2018/2020 strategic plan for Natixis CIB as green & sustainable business is one of its pillars with a twofold objective: become the reference bank in green business and double its green-related revenues, according to Azoluay.
"It capitalizes on its various green franchises already well established, such as renewable energy financing, in order to develop new green business and adapt its organization so that it can tap into these opportunities more effectively," said Azoluay, adding that the new hub also provides "a dedicated, expert and resolutely cross-asset task force whose main mission is to develop CIB's green and sustainable franchise and revenue generation on a global scale in close cooperation with Natixis' Environmental & Social Responsibility (ESR) department and in a partnership-based model with all business lines".
"One of the key mission of the Green & Sustainable Hub is to help develop a new range of innovative green products," said Azoluay. "The first Green structured note traded on the market is a key milestone in Natixis' environmental ambitions and opens up new perspectives in the green investment space."
Natixis has increased its footprint in the ESG segment over the last three years. The French bank launched at the end of 2015 the NXS Climate Optimum Prospective index, its first dedicated climate index targeted at investors wishing to make a tangible commitment to energy transition by investing in a basket of European companies actively engaged in reducing their greenhouse gas emissions and developing low-carbon solutions. The index underlies a 12-year structured green bond launched by the World Bank in 2016.
This was followed by the launch of the Federal Objectif Climat Index in October 2016, a climate index which consists of the 50 shares from the Stoxx Index 600 Europe. Most recently Natixis deployed the Euronext Climate Orientation Priority 50 Equal Weight Excess Return Index in structured products marketed in France and Italy.
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