France innovates with first inflation-linked green bond

France issued the first ever sovereign green bond indexed to inflation on 25 May 2022, accompanied by Natixis CIB as joint bookrunner along with four other banks. We look at how this innovation was received by investors, and how inflationary and environmental pressures mean the format is likely to be repeated in the future.

France, green bond leader

The French state is a major issuer of green bonds. Its latest €4 billion issuance on May 25th by Agence France Trésor (AFT), the office tasked with managing the French state’s cash requirements, takes its total outstanding to almost €50 billion, the highest of any issuer.

But far from leading only in volume, France demonstrated through its latest issuance its leadership in innovation. The bonds were not only green – earmarked to fund environmental programs under France’s Green OAT (Obligations Assimilables Du Trésor) framework – but also indexed to inflation.

Natixis CIB is a historical partner of the French state both in capital markets and ESG advisory, and is a primary dealer or SVT (Spécialiste en Valeurs du Trésor) for Agence France Trésor, reinforcing its crucial relationship through this latest transaction.

Gabriel Levy, Head of Debt Capital Markets at Natixis CIB said: “With this first ever green euro inflation linked bond, France is positioned once again at the heart of innovation on the financial markets, addressing at the same time environmental transition and inflation protection needs, both key issues facing the financial investor community. A remarkable success of which the AFT has the expertise.”

Strong investor demand

The coupon of the bonds adjusts in line with the harmonized European consumer price index (excluding tobacco). The issuance of this indexed to inflation transaction provoked strong interest among investors, coming in almost seven times oversubscribed, with an orderbook of €27.5 billion.

This demand helped on the pricing, allowing the spread to be tightened by 3 basis points to 12 basis points, giving the 15-year bonds, which have a 0.10% nominal coupon, a real yield -0.415%.

Amine Laheraitani, Head of Global Liquidity Buffer Portfolio at Natixis CIB, added: “This innovative product is a sweet spot for Liquidity Buffers, being a strong ESG asset in accordance with the Green OAT Framework while protecting against inflation risk. Natixis Portfolio Buffer was honored to be one of the supporters of this first ever sovereign ESG labelled Inflation-linked Bond ».

Funding the environmental transition

The environmental transition is a key pillar in the French recovery plan. AFT has accordingly fixed planned green bond-funded expenditures this year at €15 billion, with investments in areas including climate change mitigation, adaptation to climate change, biodiversity protection and pollution control.

Orith Azoulay, Head of Green & Sustainable Finance at Natixis CIB, said: “This new and innovative offering, particularly relevant in the current context, marks a continuation of France’s position as a pioneer in the sovereign sustainable finance market. The strong investor interest is highly promising that we will see further issuances of such formats in the coming years.” For more on the topic of greenflation, check out our new note Greenflation, the new normal?”.

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