By Seerat Sandhu (The Claremont Colleges), Cameron Caldwell (University of Glasgow), Michelle Santoso (University of Edinburgh) and Chirag Gupta (New York University)
Overview of the Deal
Banco Bilbao Vizcaya Argentaria (BBVA), a multinational financial services provider, launched two brand new social and green bonds each worth €1 billion during May-June of 2020 to help mitigate the impact of the ongoing Coronavirus pandemic and to refinance existing debt options.
The nature of the issues, the social bond was the first one of the pandemic while the green bond being the first ever issued by the financial institution has drawn a lot of interest, resulting in their oversubscription. The capital raised is intended to help BBVA resurface from the COVID-19 pandemic with a green and sustainable recovery. As with most sustainable bonds, there is some scepticism over the lack of auditing or regulation surrounding the green bond issues.
Out of both the bonds, the social senior preferred debt bond matures in 2025 and the green bond is a contingent convertible bond. Both are in line with BBVA’s 2018-2025 climate pledge and UN Sustainable Development Goals. However, recently, Fitch downgraded BBVA’ s long term Issuer Default Ratings from A- to BBB+ and Viability Rating (VR) from A- to BBB+ rating.
The bond issues have been made at a time when social bonds and green investments are trending. With record sales of green instruments in 2019, there has been a surge in eligible assets to be financed by social bonds, hence increasing customer demands. These bond issues are in compliance with UN Sustainable Development Goals and come amidst a push towards sustainable recovery during the pandemic. BBVA is an active participant in the initiatives supported by the European Union and has also joined the Green Recovery manifesto, aligning their bond issue with these goals.
The pandemic has led to the implementation of stringent lockdown measures with little known about the duration for which they would last. With the rising uncertainty pertaining to lockdown extensions and the declining health scenario in Spain, economic growth and client activity is declining in both Spain and Europe. According to the Financial Times, “The combined effect of the furlough schemes, interest rate holidays and other measures means it can sometimes be impossible to determine whether a company has a future, a loan is past due or a job is coming back.” Such trends directly affect the demand and supply channels of the current economy despite the counter-cyclical policies and economic stimulus packages being announced. A possible global recession could be the reason for BBVA responding to the market by raising these bonds.
BBVA operates in Spain, Mexico, Turkey and parts of South America. This diversification strategy acts as a positive credit rating driver for the company as they're able to compensate for losses suffered in subsidiaries of one region through improved or consistent performance in another. Despite the challenging macroeconomic outlook in terms of lower economic growth, rising uncertainty and an impending global recession, the pandemic has contributed to new lifestyle changes and consumption trends influencing the emerging energy patterns. Consequently, there has been a call to maintain sustainability which proves the timing of this issuance is well-suited to environmental goals.
Bilbao Banco Vizcaya Argentaria (BBVA) is one of the largest global financial services groups in the world with a 160-year-old history. Headquartered in Spain, BBVA enjoys a strong position in the Spanish market and operates in more than 30 other countries. The company is listed on the Madrid Stock Exchange and adopts a responsible banking model.
Founded in: 1857
Headquartered in: Bilbao and Madrid, Spain
CEO: Onus Genc
Number of Employees: 126,041
Market Cap: €21 billion
EV: €33,146 million
LTM Revenue: €19,621 million
Table 1: Current Capital Structure (CapitalIQ)
Bond Details of BBVA
Table 2: Bond Structure (Cbonds & Cbonds)
Table 3: Credit Ratings
Fitch has downgraded BBVA’ s long term IDR from A- to BBB+ and Viability Rating (VR) from A- to BBB+. This downgrade is reflective of BBVA's exposure to weakening operating markets and subsequent sensitivity to changes in its subsidiaries such as Mexico. BBVA’s Mexico subsidiary, though small in size, acts as one of BBVA’s major profit generators. Weaker loan growth, decreasing interest rates and higher credit losses have a negative impact on the bank. Weaker performance in BBVA’s Mexico operations combined with Spain’s deteriorating conditions due to the pandemic is likely to further worsen the bank's risk tolerance and profitability.
Projections and Assumptions
Why was this deal done?
BBVA had planned to issue between $2.9-$4 billion of debt this year and these issuances, the fourth and fifth of the year, to satisfy the year's planned amount. Apart from satisfying current year targets, officials from BBVA state the capital raised from the green bond would be used to “refinance projects” or to “finance new ones.”
As per speculation, the capital will be used to repay an existing AT1 bond next year. The bond will bolster the bank’s equity and retained earnings, providing much-needed stability to their balance sheets. The classification of the issuance as a Tier 1 debt indicates that BBVA would be the first to feel the effects of a backlash in a crisis.
The capital raised from the social bond issuance is directed towards BBVA’s Pledge 25 campaign to invest €100 billion from 2018 to 2025 to help tackle climate change and promote sustainable development. It also enables BBVA to refinance €1 billion of senior preferred loans from 2016, while aligning with international guidelines like those of the United Nations.
‘This is indeed the first pandemic bond that ACTIAM has invested in. The issue was priced at mid-swaps +112 basis points. This price point would also have made the bond attractive as a grey bond (i.e. not green) and since the bond has so far performed well it hits both the ESG and return sweet spots for us”
Chris Brils on the COVID-19 Social Bond, ACTIAM
In the short run, BBVA intends to use generated funds to alleviate its immediate pandemic-related troubles to ensure business continuity. These include offering financial support to clients and continuing to provide its essential services to the economies where it operates. Through its Social Bond issuance, BBVA plans to donate €35 million for the fight against COVID-19 and procure safety equipment in order to safeguard its employees and society at large. It aims to reorient its clients towards digital and remote channels as visible through a 59% transition to digital customers. The company also states that it plans to offer financial support to clients through various forms of repayment flexibility such as deferrals of loans and mortgages along with proactively providing new lines of credit. BBVA also intends to reduce its negative environmental impact through its carbon offsetting model and goal of being CO2 neutral in 2020.
The Contingent Convertible bonds are specifically designed for alleviation during crises. They are used by undercapitalised banks to bolster balance sheets by allowing timely conversion of debt to stock under certain market conditions, hence absorbing capital loss. A high ESG score has prompted oversubscription of the CoCo bonds and has enabled BBVA to generate funds at historically low-interest rates. The funds generated are to be used to repay its AT1 issuance in April 2021 and refinance another 2016 loan. The company also aims to allocate these funds towards BBVA’s €2.6 billion portfolio which aims to support eligible green assets, thus complementing its ESG criteria.
In terms of the ESG criteria, the Social Bond serves as a multifaceted buffer for the long term expected financial repercussions posed by the COVID-19 crisis. The bond is to be utilized for directing loans towards SMEs in order to generate employment through the provision of quality education and healthcare. BBVA also aims to fund special housing projects in order to create sustainable cities and communities. If implemented, these investments are likely to reduce income inequalities and poverty. However, analysts are questioning the environmental credentials of the issuance due to lack of information and the potential prevalence of greenwashing.
Through a long term lens, the bond issuances contribute towards the firm's larger goal of raising €100 billion in sustainable funds by 2025. BBVA through its Green Contingent Convertible (CoCo) bond hopes to improve the company’s financial health and increase its client outreach. “The AT1 bonds BBVA raised were introduced after the financial crisis by regulators to shore up banks’ balance sheets. They have no fixed maturities, meaning that banks do not have to repay the principal.” The instruments — also known as contingent convertibles, or CoCo's — can be converted into shares or written down if a bank needs to raise its capital levels. BBVA aims to align its sustainable goals with the Paris Agreement to help clients transition towards a sustainable future through investments in energy efficiency, renewable energy, and waste management. In order to achieve customer satisfaction and its client outreach goals in the post-pandemic world, BBVA wishes to direct funds to deliver on the strategy through improved technology and superior data analytics.
“ The pandemic has made the sustainability agenda even more important”
Carlos Torres Vila, BBVA’s Group Executive Chairman
Financial Ratio Analysis
Table 4: Financial Ratios for BBVA (BBVA)
BBVA's overall profitability is declining as ROA, ROE, ROCE are declining. This signals a decrease in net income and the inability to manage their internal operations effectively
BBVA’s coverage ratio is increasing which is significant as their allowances for loan losses as a percentage of impaired loans is increasing, while the company’s cost of risk is increasing, signalling a distressed future. The bank has been extremely active this year with its issues, but it is running losses, which might forecast a period of lowered efficiency and heightened expenses
The efficiency ratio stood at 45% at the end of the quarter, significantly below the level reached at the end of March 2019 (48.3%). As a result of gross income growing faster than expenses, the operating income line increased by 20.3% year-on-year
Risks and Uncertainties
BBVA is experiencing increased operating risks due to the many lockdowns imposed by COVID-19 in its countries of operation. Apart from the threat to demand and supply chains posed by the pandemic, business disruption risks continue to exist because of uncertainty regarding extension of lockdown measures both in Spain and other countries of operation. The geographical diversification of BBVA over the Latin and European regions may prove to be a negative factor for the company’s performance in light of the COVID-19 pandemic due to worldwide economic shutdowns in most economies across the globe.
In recent years there has been a shift in client behaviour and expectations towards more digital and personalised needs for BBVA. The company has been adapting its operations to meet such client demands through remote channels, as can be seen through its 63% penetration in digital sales and 54% penetration in terms of mobile customers. Furthermore, the pandemic has played the role of a catalyst by hastening the process. A sudden shift to increased technological reliance has increased threats pertaining to cybersecurity.
Issuance of COVID-19 Social Bonds puts the bank under further scrutiny due to the rising social washing incidences. Such funds are being issued in big numbers post-pandemic for specific purposes such as immediate relief, purchase of medical equipment and most importantly, for general uses once the pandemic is over. There is no guarantee that the money would be used for socially useful purposes. Additionally, lack of transparency and vagueness in terms of both beneficiaries of bonds and their usage is reflected in the expected credit rating of BB (Fitch) and B2 (Moody’s). Furthermore, being the first lender to issue the riskiest form of bank debt, with a green tag on it, increases the risk of potential decline in investor confidence due to green and social washing allegations.
"We believe sustainability should not be compromised in times of crisis. On the contrary, we see increasing opportunity for green and social bonds in the COVID-19 relief. We look forward to seeing a step-up in sustainable bond frameworks to come"
Karina Carius de Barros, responsible investment officer at ACTIAM
Will BBVA be able to repay?
According to Moody's, downward pressure on BBVA’s Baseline Credit Assessment (BCA) could exist due to the underperformance of Garanti BBVA’s asset quality deterioration in Turkey along with the bank’s inadequate risk-absorption capacity caused by excessive debt issuances and lower share of recurring earnings. Furthermore, the bank’s deposit and senior unsecured debt ratings would directly be affected in the event of failure to deliver on its funding plan. Notably, BBVA has $7.761 billion of maturities due in 2020. Given the company is highly active in issuing bonds and issued another £300 million in subordinated Tier 2 bond recently, it is tough to predict their ability to pay the upcoming obligations.