Mexico City Airport: “The green bond that was no longer”
Green bonds turn sour after airport project is cancelled
When Mexico City Airport Trust issued $6 billion of green bonds in 2016 and 2017 in order to finance the construction of a new airport, the New Mexico City International airport, the investor community welcomed a green issuance from a sector that hadn’t been linked to sustainability and the green financial markets before. The bonds exceeded ICMA Green Bond Principles (“GBP”) standards, obtaining a second party opinion from Sustainalytics as well as green instrument evaluations from rating agencies Moody’s and S&P.
However, in October 2018, the newly elected Mexican government shocked investors when it announced to halt the construction of the airport, following a public referendum in the same month that had resulted in a majority of voters demanding for the new airport not to be built.
After the shock outcome, the green airport bonds unsurprisingly underperformed the market – by as much as 200 basis points in November. Upending market confidence and receiving harsh critique from investors for an initial offer, the government launched a buy back package, capped at $1.8 billion of $6 billion outstanding, with a buyback price of par plus accrued and unpaid interest.
While this offer placated investors concerned about the value of their investments, the green evaluators involved in the project took immediate action: Moody’s lowered its green bond assessment from GB5 (highest score) to GB1 (lowest score), noting that the proceeds (40% of scoring) no longer constitute qualifying environmental projects. S&P withdrew its green evaluation report, emphasising that the residual bonds were different to what had been evaluated at the time of the initial bonds offer.
Continuous independent assessments vital to ensure green stays green
Despite market observers welcoming these steps and some investors appreciating the tender opportunity after their holdings lost their expected environmental benefits, the high profile project has renewed some investors’ scepticism towards green issuances.
With independent assurance companies mitigating the risks of bonds-“greenwashing”, the focus has now shifted towards measures that ensure a green bond remains a green bond until the end of its maturity and that issuers’ reporting about the developments of their green projects is in fact true.
Hence, in addition to “at-issuance” verification, green market players now discuss the need for external assessors regularly reporting back to investors on the development of the projects underlying a green bond. This will almost certainly become a requirement for issuers, who aren’t already providing such on-going external assurance, and will become a standard question in the long list of queries green investors demand an answer for during their due diligence.
Another challenge remains: Mexico City Airport Trust’s residual bonds are still technically labelled as green – the proceeds are still specified to be used for sustainability improvements – and hence likely still appear in various green bond indices. This sheds a light on the risk of such “fake green bonds” muddying the waters of green indices. To maintain the integrity of the green label, banks, portfolio managers and other capital markets players equally have to commit in this context to stringent standards and controls when selecting green bonds for their indices and swiftly remove bonds that have lost their “greenness”.
This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes. It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.
This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.
NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc.
Copyright © NatWest Markets Plc. All rights reserved.
16th January 2019
Dr Arthur Krebbers