Wall Street banks pivoting to meet investor hunger for pandemic bonds

  • Investors have been eagerly buying up pandemic bonds — debt instruments directly financing efforts to fight Covid-19.
  • Bonds tied to financing social projects like housing, healthcare, and education have long lagged beyond their environmental cousin, the green bond. 
  • But social bonds have surged in response to the coronavirus outbreak, and Wall Street is betting the enthusiasm for such products will increase over the long haul as a result. 
  • Wall Street banks in recent weeks have have unveiled new business units, appointed new leaders, and convened senior execs to devise ways to meet the growing demand for socially minded investments.
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Investors are clamoring for ‘pandemic bonds’ linked to the coronavirus recovery effort, and Wall Street banks are preparing for a deluge of similar socially-minded financing opportunities in response to the pandemic.  

Investments that fund Environmental, Social, and Governance (ESG) projects have gained momentum in recent years — spurred on by shareholders, like BlackRock, that have demanded companies start accounting for their impact on society. Money has also been pouring into funds that screen for investments based on ESG factors, with global sustainable fund assets reaching a record $960 billion at the end of 2019, according to Morningstar. 

But they’re a drop in the broader capital-markets ocean, and even amid their steady growth they’ve long been viewed with skepticism in some corners as a marketing gimmick to cleanse corporate brands or an extraneous luxury suited for times of economic abundance.

Amid a public health and financial crisis, Wall Street is betting the exact opposite — that the Covid-19 pandemic has fundamentally altered the mindset around such investments and that their future is brighter than ever. 

Just in recent weeks, banks have been rejiggering their businesses, appointing new leaders, and convening senior execs to devise ways to sate the client hunger for sustainable investments — financial products underwritten with clear targets for funding remedies to societal ailments.

Bank of America this week announced the closing of the first pandemic bond issued by a US commercial bank. The proceeds of the $1 billion bond will be allocated to new and existing healthcare clients the bank reasonably believes to be involved in fighting Covid-19, including not-for-profit hospitals, skilled nursing facilities, and manufacturers of medical supplies, according to the deal documents.

That deal is part of a broader surge in social bonds amid the outbreak. While financing for ESG projects plummeted to $59 billion in the first quarter, down 32% compared with the previous quarter, much of the decline was in green bonds, according to analysts at credit-ratings agency Moody’s. Meanwhile, social bonds — which fund efforts geared toward public health, education, food security, and affordable housing — tallied a quarterly record of $11.9 billion.

Moody's social bonds



Moody’s


HSBC said the issuance of social and sustainability bonds, which can fund responses to both the public health and economic crises resulting from Covid-19, surged 69% in the first quarter compared with 2019.  

Other banks have unveiled major changes this month as well. 

Citigroup on Tuesday announced a new unit within its investment bank that will cater toward clients’ burgeoning interest in sustainable finance. The firm’s sustainability and corporate transitions group will be led by Bridget Fawcett and Keith Tuffley, according to a memo from Tyler Dickson and Manolo Falco, the coheads of banking, capital markets, and advisory. 

“The current Covid crisis will elevate the importance of ESG to our clients, as they increasingly focus on more sustainable and resilient strategies and on recovery plans,” Dickson and Falco said in the memo.

Deutsche Bank in mid-May announced its first-ever official targets for sustainable financing investments, committing to deploy $215 billion by 2025 across loans, bonds issued for clients, and assets in its private bank. The bank hired Kamran Khan, a former World Bank official, for a new role as head of ESG for the Asia Pacific region. 

The firm also announced at the end of April a new ESG team within its capital-markets group, appointing a handful of educates to helm the effort.

Investor demand growing

The surge in interest in social and sustainable bonds has been an unexpected byproduct of the pandemic, according to Moody’s. 

“An indirect consequence of the global coronavirus outbreak over the past two months has been the heightened focus of sustainable investors on social issues,” Moody’s analysts said in report from early May.

“In a remarkably short period of time, market attention on harnessing the powering of finance to support the necessary recovery from the crisis has placed social and sustainability bonds at the forefront of many market participants’ minds.”

While the market sell-off in March drained $385 billion from the overall fund universe in the first quarter, global sustainable funds saw net inflows of $46 billion, according to Morningstar. 

Bank of America wasn’t the first to conjure up a virus-response bond. Much of the issuance thus far has been from multilateral development banks, like the World Bank and the African Development Bank, which have raised record-breaking sums from investors to finance coronavirus relief efforts and prop up healthcare systems in poorer nations.

pandemic bond issuers_Moodys



Moody’s


African Development Bank’s $3 billion “Fight Covid-19” social bond issuance on March 26 — which received bids for 50% more funding than it ultimately raised — was the the largest dollar-denominated social bond issued in international capital markets to that point. 

About a month later the World Bank launched an $8 billion offering — with Citi and Deutsche Bank among the lead managers on the deal — a record figure for a supranational organization. It drew intense demand, with 190 investors comprised by central banks, asset managers, and pensions lining up and placing $12.5 billion in orders, the largest ever order book for the World Bank. 

Companies like Pfizer and USAA have issued debt in part to combat the health crisis as well, and Swedish medical supplier Getinge raised $92 million for the express purpose of manufacturing ventilators.

Around the time the first pandemic bonds were being issued, bankers in Bank of America’s treasury and debt capital markets divisions started working on a virus-response bond of their own. 

Moody's social bonds



Moody’s


The firm, one of the pioneers of green bonds and the top global underwriter of ESG financing, was well-positioned to act, having formed a new sustainable markets committee in January, with a goal accelerate BofA’s capabilities and services in sustainable finance, coheaded by COO Tom Montag and vice chair Ann Finucane, who leads the bank’s broader ESG group. 

That month Karen Fang, a star in the firm’s sales and trading division who’d just been promoted to an ambitious new role a year earlier, relinquished some of her trading responsibilities to assume the role of global head of sustainable finance, a newly created position at the firm. 

Social bonds historically have lagged far behind green bonds, which dominate the space, accounting for 80% of the record $323 billion sustainable bonds issued in 2019. 

But Covid-19 flipped the script — green bonds cooled and social bonds jumped to record levels. In Fang’s view, the crisis helped spotlight the utility and applicability of social bonds, helping erode some of the skepticism that has trailed the sector. 

“If you think about social issues, it’s healthcare, it’s education, it’s low-income community development. A lot of that is harder to finance. It’s not impossible, but it’s harder,” Fang told Business Insider. “The pandemic opened up a new market for investors to make a difference in the world of needed capital in a crisis.”

Bank of America’s nascent Covid bond reached the sustainable markets committee for discussion in April, and by the time it priced in mid-May it had attracted an enthusiastic response. It was oversubscribed multiple times, allowing the firm to price it aggressively at a yield of just 1.46%, the bank said. The firm will track and report the results of its Covid bond on a designated website.

Karen Fang Bank of America

Karen Fang now runs sustainable finance at Bank of America.

Bank of America Merrill Lynch


Given the record levels of debt issuance amid the coronavirus fallout, the social bond flurry still represents a minuscule slice of the market. 

But Fang and growing chorus of Wall Street experts believe the rush of pandemic bonds will stoke demand for socially minded financing over the long-term, and banks are reorganizing their franchises to capture the opportunity. 

“Greater emphasis on social finance and sustainable development will likely be one of the lasting outcomes of the coronavirus crisis,” Moody’s analysts said in their report. 

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