Central and Southern America are ahead of the US in issuing hard-currency labelled bonds – green, social, sustainability and sustainability-linked bonds – at least in percentage terms. The Chilean government is a leader in this funding.
Green, social and sustainability bonds fund environmental and social projects. In contrast, sustainability-linked bonds don’t fund projects but penalise issuers if they fail to meet environmental or social goals, thus focusing on outcomes rather than inputs.
Labelled bonds make up 4.0 per cent of hard-currency bonds in the region compared with just 1.8 per cent in the US. That puts it ahead of the Middle East too, though Europe still leads, with labelled bonds making up 8.2 per cent of euro corporate bonds.
However, they comprise 20.5 per cent of Chile’s hard-currency bond totals – more than USD20 billion, of which the government accounts for USD16 billion, spread across a mix of green, social and sustainability bonds denominated in US dollars and euros. The figure for Guatemala is 14.6 per cent, though that is a very small market, but Mexico’s issues total USD12 billion, with Brazil close behind.
Most issues are in US dollars and issues in Mexican, Chilean and Brazilian currencies are exceeded by euro-denominated bonds, which appeal to European investors. The Southern America local-currency market is much less developed – labelled bonds accounting for only 0.3 per cent of local-currency debt – but again, Chile is the leader: labelled bonds comprise 4.9 per cent of local-currency bonds, with the government responsible for USD4.1 billion of the USD4.2 billion total.
Non-financials have the highest share of hard-currency labelled bonds at 5.5 per cent, followed by sovereigns and sub-sovereigns at 3.5 per cent, with financials at just 1.5 per cent. Supranationals, such as the Inter-American Development Bank, add a further USD5.8 billion.
Issuance of labelled bonds has been especially strong in 2021. The USD28.5 billion of issues in the first seven months was more than double the 2020 total, itself a record year – and seven-times for sustainability-linked bond issues.
Supranationals are important in emerging markets, especially in this region. Some 22 per cent of the proceeds of green bonds and 23 per cent of sustainability bonds issued by the IBRD, the World Bank’s lending arm, are applied to Latin America and the Caribbean.
Emerging-market bond funds that can hold Latin American instruments have more than USD500 billion of assets. Sustainable-bond funds now make up 3.4 per cent of this and have seen consistently higher inflows relative to assets than non-sustainable bond funds over the past two years.
Investors increasingly want to apply ESG strategies – environmental, social and governance – to emerging markets but face two challenges. First, disclosure and the data needed for ESG analysis are more limited in these markets, which could deter European investors. Second, measures of ESG are strongly correlated with wealth so applying them could penalise poor countries simply for being poor.
Labelled bonds offer a possible solution. They are a well-established, well-understood product whose global market exceeds USD1 trillion. Investors like them because they offer an easy way to demonstrate positive ESG impact with good disclosure and can be issued by any kind of issuer in any region. And issuers like them because they demonstrate their ESG credentials, access new investors, and potentially reduce the cost of funding.
Labelled bonds are thus well suited to Latin America.
First published 3rd August 2021.
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Dominic Kini
Fixed income: Basis for financial analysis
This report is designed for, and should only be utilised by, institutional investors. Furthermore, HSBC believes an investor's decision to make an investment should depend on individual circumstances such as the investor's existing holdings and other considerations.
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Definitions for fundamental credit and covered bond recommendations
Overweight: For corporate credit, the issuer’s fundamental credit profile is expected to improve within the next six months. For covered bonds, the bonds issued in this country are expected to outperform those of the other countries in our coverage over the next six months.
Neutral: For corporate credit, the issuer’s fundamental credit profile is expected to remain stable for up to six months. For covered bonds, the bonds issued in this country are expected to perform in line with those of the other countries in our coverage over the next six months.
Underweight: For corporate credit, the issuer’s fundamental credit profile is expected to deteriorate within the next six months.
For covered bonds, the bonds issued in this country are expected to underperform those of other countries in our coverage over the next six months.
Definitions for trades (Rates & Credit)Buy and Sell refer to a trade call to buy or sell a bond, option on an interest rate swap ("swaption"), interest rate cap or floor, inflation cap or floor, or Total Return Swap ("TRS"). The buyer/seller of a TRS receives/pays the total return of the underlying instrument or index at the end of the period and pays/receives the funding leg.
Buy protection and Sell protection refer to a credit default swap (CDS): the protection buyer/seller is effectively selling/buying the reference entity's credit risk.
Pay and receive refer to a trade call to pay or receive the fixed leg of an interest rate swap (IRS), a non-deliverable IRS, the firstnamed leg of a basis swap, the realised inflation leg of an inflation swap, or a forward rate agreement (FRA). An investor that executes a pay or receive trade is said to be "paid" or "received."
Payer and receiver refer to inflation caps or floors and to swaptions: a payer is an option giving the right but not the obligation to enter a paid position in an interest rate or inflation swap, and a receiver is an option giving the right but not the obligation to enter a received position in an interest rate or inflation swap.
ASW (also asset-swap, Buy on asset swap, Buy on an asset-swapped basis): Buy a bond packaged with a swap that is tailored to eliminate the bond’s interest rate risk, effectively transforming the bond to a floating rate instrument whilst preserving the credit exposure to the bond issuer.
RASW (also reverse asset-swap, Sell on asset swap, Sell on an asset swapped basis): Sell a bond packaged with a swap that is tailored to eliminate the bond’s interest rate risk, effectively transforming the bond to a floating rate instrument whilst preserving the credit exposure to the bond issuer.
Distribution of fundamental credit and covered bond recommendations
As of 01 August 2021, the distribution of all independent fundamental credit recommendations published by HSBC is as follows:
All Covered issuers Issuers to whom HSBC has provided Investment Banking in the past 12 months
Count Percentage Count Percentage
Overweight 117 26 63 54
Neutral 216 48 86 40
Underweight 116 26 40 34
For the purposes of the distribution above the following mapping structure is used: Overweight = Buy, Neutral = Hold and Underweight = Sell. For rating definitions under both models, please see "Definitions for fundamental credit and covered bond recommendations" above.
Distribution of trades
As of 30 June 2021, the distribution of all trades published by HSBC is as follows:
All Covered instruments Issuers to whom HSBC has provided Investment Banking in the past 12 months
Recommendation Count Percentage Count Percentage
Buy 142 76 84 59
Sell 44 24 22 50
For the purposes of the distribution above the following mapping structure is used: Buy/Sell protection/Receive/Buy Receiver/Sell Payer = Buy; and Sell/Buy protection/Pay/Buy Payer/Sell Receiver = Sell. ASW is counted as a buy of the bond and a paid swap, and RASW as a sell of the bond and a received swap. For rating definitions under both models, please see "Definitions for trades (Rates and Credit)" above.
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