Green RMBS Is No STORM in a Tea Cup
In recent months we’ve seen a growing number of RMBS and even CLO deals being issued with an ESG label. In itself we certainly view this as a positive development for the ABS market, though we do tend to be relatively sceptical when we hear issuers’ claims about ‘social’ or ‘responsible’ lending, or challenger banks’ focus on ‘underserved’ customers. This is mostly because the various markets for Prime mortgages in Europe are very heavily regulated – even more so post-2008 – and as a consequence you just don’t tend to see any irresponsible mortgage lending from banks or building societies.
One thing we haven’t seen too much of, however, is RMBS transactions with a ‘Green’ label. Last week the well-known Dutch lender and RMBS issuer Obvion (fully owned by Rabobank) sold €500m of AAA bonds in its 46th Prime RMBS deal, called Green STORM 2021-1. This is Obvion’s fifth Green RMBS since 2016, and it was very well received by the market. After a few rounds of tightening the AAAs – which are ECB-eligible collateral and thus typically extremely liquid – ended up being 4x covered at a final price of Euribor+15bp. In our view that level was 2-3bp tighter than where a normal STORM transaction would have been priced, so the Green element appears to have helped Obvion obtain slightly cheaper funding.
For most investors this deal would likely be considered a liquidity position, and at a spread of 15bp this is certainly not the sexiest proposition the European ABS market has to offer, but what is interesting about this latest instalment from the STORM platform is what makes the deal ‘Green’.
The transaction aims to promote energy-efficient housing, with Obvion offering incentives to its borrowers to invest in energy-saving measures. In fact, 91% of the properties in the pool have an energy label of A and none score lower than a C, giving Green STORM 2021-1 materially lower CO2 emissions than other comparable RMBS pools. The incentives banks offer in the Netherlands for sustainable or green mortgages tend to come in the form of cheaper rates and higher loan-to-value (LTV) ratios for refurbishments if they are used for energy-saving measures. In addition, Obvion offers education on sustainability and a budget of up to €9000 that borrowers can use to invest in energy-saving measures.
With many countries looking to achieve net zero emissions by 2050, we believe the financial sector can make a big contribution to this goal, and with more capital being allocated to sustainable funds we expect to see and welcome more of these transactions in the near future.
We can’t really fault Obvion on this deal’s green credentials and we definitely regard the lender as one of the leaders in this field; we only hope they also offer some non-AAA rated bonds in the future.