(Bloomberg) — In January, Ecuador sold $400 million in government social bonds to help finance affordable houses.
Four months on, the value of the debt, which matures in 2035, has slid, pushing the yield to 7.3%, as the South American nation grapples with the economic fallout from the spread of the coronavirus outbreak.
Yet, so far, there’s little sign that Ecuador’s struggles are keeping investors away from social bonds, the fastest-growing part of sustainable finance. Originally designed to finance improvements in society, issuance has surged as governments seek to pay for the health and employment programs in the battle against the coronavirus. Social bond sales outpaced green bonds for the first time in March and April, according to fund manager Amundi SA.
Social bonds “were certainly easier to place” than green bonds sold by companies in recent weeks, especially if used to pay for pandemic measures, according to Magdalena Polan, global emerging-market economist at Legal & General Investment Management.
“During the crisis, bonds – even green – issued by companies may be less attractive,” she said. “Governments are safer, even if we’re talking about the still quite exotic social impact bond.”
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The issuance of social bonds globally more than quadrupled this year to $24.5 billion, according to data compiled by Bloomberg, with development banks such as the World Bank and the Inter American Development Bank selling debt to tackle the impact of the virus.
Social bond issuance across emerging-market sovereign and corporate borrowers has doubled to $5.2 billion this year, compared with $2.3 billion for the whole of 2019. Last month, Paraguay sold a $1 billion, 11-year Covid relief bond to yield 4.95%.
The government-owned Korea Housing Finance Corporation, which provides long-term mortgage loans, sold 1 billion euros social bonds in January. Bank of China, also state owned, sold Hong Kong dollar-bonds in February to support employment generation through financing smaller companies, with the yield falling more than 30 basis points since March to 1.7%.
Earlier this month, Bank of America Corp. priced a $1 billion bond issue to fund Covid-19 relief efforts, the first sale from a U.S. financial institution that explicitly links all proceeds to tackling the virus.
“Social bonds are particularly well suited to showcase the efforts made by public financial institutions to support healthcare services and the economic recovery,” said Timothee Jaulin, Paris-based head of global supranational entities coverage at Amundi. “The recent uptick in social bond issuance shows that issuers and investors have shown signs of confidence in the use of the format.”
That remains despite the travails of Ecuador’s social bond. Last month, the government won consent from bondholders to suspend coupon payments on its foreign debt until mid-August. The country is seeking relief on $18 billion of foreign debt as it grapples with the Covid-19 virus, as well as a crash in the price of oil, its biggest export.
The nation’s the social bonds have generated a negative return of 51%, compared with the nation’s conventional debt, which has generated negative returns of 60%.
“That’s a special case, being Ecuador risk, though I would suggest this will deter investors in the future from buying social bonds from countries with a history of being stressed, unless they have guarantees the country’s conventional bonds don’t,” said Richard Segal, a senior analyst at Manulife Investment Management in London, which has $625 billion of assets.
Social bonds from higher-rated emerging nations such as China, South Korea or Poland “would be considered very safe,” he said.
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