EXCLUSIVE: Denmark Debt Head: New Green Bond Should Easily Attract Full DKK15 Bn 2022 Volume

18 January 2022

By David Barwick – Frankfurt (Econostream) – The green bond issuance announced last month by Denmark has generated high interest and should have no problem attracting the maximum possible volume this year of DKK15 billion, according to Martin Wagner Toftdahl, Head of Monetary Policy Operations and Government Debt at Danmarks Nationalbank.

In an interview with Econostream on Friday, Toftdahl emphasised the importance in the context of the green bond of Danish alignment with the EU classification system for sustainable economic activities.

Whilst the 10-year green bond would probably be somewhat less liquid than one of the country’s existing conventional 10-years with which it would share financial characteristics – the green bond’s ‘twin’ – that should not present any difficulty, he said, given the possibility of switching from the former to the latter.

‘We of course anticipate that we will be able to issue the DKK15 billion during this year’, he said. ‘We have seen large investor interest over quite some time, and we would be surprised if we were not able to issue 15DKK billion this year.’

The first auction, scheduled for Wednesday, will be up to DKK5 billion, but there is ‘no pressure’ to frontload a large portion of total 2022 volume, he said. ‘The announcement was well received and we anticipate having the full year to issue the DKK15 billion, so we don’t see any challenges.’

While expecting to come ‘very close’ to DKK15 billion, under no circumstances would 2022 issuance significantly exceed this, so as to leave ‘a safety margin in terms of underlying expenditures’, Toftdahl said. The target of DKK15 billion was ‘well within the safety margin.’

Denmark’s desire to align the green bond very closely with EU taxonomy is part of the country’s commitment to ‘an effective and transparent green capital market’, he said. ‘As a sovereign issuer, we see ourselves as an important part of that market, so we wanted to set the bar high in terms of both the quality of our green expenditures, but also a forward-looking framework.’

The green bond issuance was thus ready to be adapted to legislation yet to come, such as a fuller taxonomy or the EU Commission’s proposal regarding an EU green bond standard, he said. In tandem with the development of EU taxonomy, currently only encompassing two environmentally sustainable economic activities out of ultimately six, the scope of Denmark’s green bond framework would evolve as well, he said.

Even more fundamentally, the Danish government is constantly on the lookout for the most appropriate expenditures, he said. ‘One thing is to be aligned with the EU taxonomy, but beneath that there is also a dialogue with the different ministries about which green expenditures deliver the most quality.’

‘But the most important part is the transparency that our framework creates’, he added. ‘We also report back to the market on the environmental impact of the projects linked to the green bond. Creating such a direct and transparent link will contribute to moving us in the right direction.’

The green bond issuance volume this year of DKK15 billion represents a relatively high proportion of total 2022 Danish issuance of DKK65 billion.

‘We are comfortable with that level, but we also recognize that there are limits to how high the share of green borrowing can get’, Toftdahl said. ‘As a sovereign issuer, we naturally also have to remain very focused on keeping liquidity in our main benchmark series, and not least the 10-year that is the green’s twin. The twin bond framework wouldn’t make sense otherwise, and we are very clear about limits regarding how much we can have in terms of green issuance.’

Nonetheless, as the green bond series would be smaller than its twin, it would be ‘slightly’ less liquid, he said. ‘But the concept accommodates that to a very large degree, because investors have the security of being able to switch into a more liquid bond, which should minimise the liquidity premium’, he said.

The choice of a regular auction to issue the green bond rather than a syndication was ‘quite natural’, auctions being the standard for the Danish sovereign issuer even – in contrast to many other issuers - in the case of an inaugural issuance, he said. ‘We wanted to signal that the green bond is a part of our regular issuances’, he said.

Toftdahl was relaxed about the possibility of competition for Denmark’s green bond. ‘What we are seeing is a lot of demand for green issuances, and it seems like there is more demand than supply at the moment’, he said.

The denomination in Danish currency meant the green bond represented a hitherto unavailable opportunity for local investors, he said. ‘So, I don’t see us in sharp competition with other sovereign issuers in this area’, he said.

There have been expressions of high interest both nationally and internationally, so that the expectation is that demand on Wednesday will be of both types, with the former likely to dominate, he said. ‘We also see in our regular issuances that there is a larger share of local investors, and I would expect it to be the same for our green issuance as well’, he said.