In this issue of Dechert’s International Capital Markets Team’s “In Conversation With...” series, associate Amy Rees and partner Patrick Lyons sit down with Maurizio Pastore, Head of Debt and Funds Listing at Euronext Dublin, to discuss:
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Trends seen in the debt capital markets to date in 2022;
- The growing importance of environmental social and governance (“ESG”) considerations for both investors and issuers; and
- Euronext’s Federal Model.
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Recent General Market Developments and Trends
Dechert: What are the main trends Euronext Dublin has seen on issuance volumes and types of issuances as a result of the COVID-19 pandemic? Do you expect these trends to continue?
Maurizio Pastore: The pandemic has demonstrated the resilience of the ESG asset class with an increasing demand from investors during the COVID-19 crisis period. Euronext experienced a great listing flow of ESG products in 2020 and we expect this to grow in the future. In particular, many ESG products were issued to remedy the social impact of the COVID-19 pandemic, to provide funding for public entities and corporates in the public sector, social welfare plans, hospitals and municipalities.
2021 was also a great year for collateralised loan obligation (“CLO”) listings, with almost 6,000 CLOs listed in Dublin. We also saw public entities and blue-chip issuers from several jurisdictions, including Latin America and the Middle East tap the market. While we recognise that the majority of CLO deals were issued as resets and refinancings, we do believe that CLOs, and asset backed securities (“ABS”) products in general, will continue to be popular. This was indicated by the deal pipeline for the first quarter of 2022, which unfortunately did not materialise due to instability in the market following the outbreak of war in Ukraine. However, in May we saw a few CLOs and High Yields going public as issuers become comfortable with the new market conditions and pricing, and we consider that the pipeline is potentially strong in 2022, although in a very different context compared to 2021. We have many years of experience with ABS products and we are trusted by issuers to provide an informed and efficient process.
Dechert: The Russian invasion of Ukraine in February this year, the ongoing conflict and the subsequent financial sanctions placed on Russia by the international community have led to volatility in the debt capital markets. What impact has this had on Euronext Dublin to date in 2022?
Maurizio Pastore: Naturally, the conflict in Ukraine added further instability to an already challenging macroeconomic environment, which did not help the issuance pipeline both on the equity side and on the debt side. Investors were nervous of the high volatility and issuers were hesitant to tap the market with growing yields. There has, however, recently been a “normalisation” of conditions and the market is beginning to pick up again.
Euronext has contingency plans in place and is monitoring the current situation closely. As a Pan-European exchange we have taken actions to delist, suspend or mark as non-negotiable securities domiciled in Russia or Belarus, where deemed necessary, to comply with applicable sanctions.
Dechert: In 2021, 78 percent of new listings were on the Global Exchange Market (“GEM”), as compared to the Main Market. What is the reason for the increase in issuer appetite to list on GEM?
Maurizio Pastore: Excluding 2021, which was an exceptional year, our exchange regulated market, GEM, has grown by approximately 60 percent year on year, as compared to the 40 percent growth seen by the Main Market. This is because investors are becoming more and more confident in “solid” multilateral trading facilities (“MTF”) (i.e., MTFs, which provide transparency and security for institutional investors).
We have worked very hard to ensure that GEM strikes the right balance of delivering efficiency of review and competitive pricing without sacrificing transparency and reputation. Euronext prides itself that a listing on GEM is widely recognised by investors as having been subject to sufficient scrutiny but at the same time our clients can take advantage of our flexible industry-focused approach. In addition, GEM provides certainty of timeframe, which is valued by all parties and their advisors. It is these traits that have appealed to issuers and investors alike and have contributed to the success of GEM. Our review team also has many years of experience and specialist expertise in listing certain products such as CLOs and therefore can offer expedited reviews. For these reasons, a large number of such issuers chose to list with us last year, which contributed to the exceptional growth numbers mentioned.
We know that the Main Market plays a crucial role in housing investments for investors such as pension funds, insurance companies and banks, which may have wider asset allocation if listed on a regulated market. We therefore consider GEM’s growth to be healthy but also recognise the importance of a functioning EU regulated market for debt issuers.
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ESG Matters
Dechert: Last year, there was an 86 percent increase in ESG bond listings on Euronext, with 436 ESG bonds listed in 2021, as compared to just 235 in 2020. This seems to demonstrate the growing importance of ESG considerations to investors; how does Euronext Dublin think this will affect the markets in the longer term?
Maurizio Pastore: As regulatory powers, investors (and society in general) push companies to implement ambitious sustainability targets, we expect that ESG bonds will continue to multiply in order to support these commitments. We have noticed that small and medium corporates are particularly keen to increase the use of sustainability-linked bonds or green bonds and, as a result, in the coming years we expect that almost all debt issuances will have an ESG angle.
We are invested in supporting this positive trend with the aim of becoming a world leading ESG bond listing venue by the end of 2022. We are also tracking the 1.5-degree commitment of our issuers.
Companies are incorporating sustainability risks and factors into their overall strategy, which appeals to an ever-growing investor appetite for ESG opportunities. There is no doubt that COVID-19 has helped accelerate this growth and the diversification of this sector in 2021. The highly volatile market conditions in the first quarter of 2022 have also impacted ESG growth. Sustainable bond issuances reached US$232 billion in the first quarter of 2022, which represents a decline of 19 percent from the first quarter of 2021 (US$287 billion). During the period, we have seen ESG bond issuances slow down from public agencies and sovereigns, while European corporates showed resilience and experienced a slight increase compared to the first quarter of 2021. Euronext is capturing this business and our ESG business grew during the first quarter of 2022 despite declining ESG markets.
Dechert: Do you see any potential obstacles to this growth continuing, for example, the increased concerns of “greenwashing”?
Maurizio Pastore: We consider the risk of greenwashing for the issuers listed with us to be limited at present as no market participant wants to be associated with such practice due to the public focus on the issue and the consequential reputational damage. Investors are becoming increasingly demanding in relation to ESG reporting requirements and key performance indicators and it is likely that a reduction in the risk of greenwashing will be a target of incoming reforms to the Prospectus Regulation.
We believe that more stringent regulations will be implemented in the near future and understand that the EU Commission is preparing a green bond standard.
One issue is that small and medium-sized enterprises that could benefit from ESG bond issuances may suffer from the disproportionately large cost of reporting. At the moment, issuers of ESG bonds are not sufficiently compensated by pricing premiums, as compared to normal bonds, despite the enthusiasm for ESG bonds. In our view, regulators and legislators need to somehow offset the burdensome and costly reporting requirements to make such issuances more attractive.
Dechert: The majority of the ESG listings on Euronext last year were “green bonds” and only a few were “social bonds” and “sustainability-linked bonds”. Does Euronext Dublin see this as likely to change in 2022 and the coming years? Does Euronext Dublin expect significant uptake of other “new bonds”, such as “gender bonds”?
Maurizio Pastore: At Euronext, green bonds continue to lead the way in terms of listed ESG asset classes. But since 2020 we have also experienced a significant increase in the listing of social bonds, which were issued to mitigate the negative impact of the COVID-19 pandemic. Since ICMA issued its sustainability-linked bonds criteria and the ECB accepted this paper as collateral, this product has grown exponentially, from three sustainability-linked bonds listed with us in the first quarter of 2021 to 13 in the first quarter of 2022.
We actively support any product that helps companies to transition to a more sustainable form of financing. We believe Euronext is well positioned to support the uptake of any new ESG product (blue bonds, gender bonds, etc.) since these types of instruments are reviewed under the same stringent EU regulatory framework but require an efficient and agile listing process.
Dechert: In 2021, Euronext helped issuers raise €703,040 million in ESG bonds, a larger amount than that seen on the Luxembourg and London Stock Exchanges. What do you think differentiates Euronext’s ESG Bonds Platform from the other listing venues?
Maurizio Pastore: Euronext Dublin is catching up to the Luxembourg Stock Exchange in terms of green bond issuances and it was the first exchange to list sustainability-linked bonds (even before the ICMA guidance was published in 2019). Euronext Paris also has a strong leading focus on ESG investments.
A listing of existing ESG bonds is displayed on our Euronext ESG Bonds Platform free of charge, providing issuers with greater visibility at no extra cost. Documents and information about the ESG nature of the bond, including second party opinions, credentials reports and ESG frameworks, are provided by the issuers and are uploaded in a repository on the platform for public access. We now have a dedicated “ESG Champion” who is an expert on all things ESG and focuses on development and supports issuers in their journey to list their ESG bonds with Euronext. We hope that this resource will help international issuers access the debt capital markets with confidence and an ESG purpose. We also plan on including a dedicated section within our website to promote ESG bond issuers who have committed to the Paris Agreement objective and the 1.5-degree target.
Recently Euronext produced one of the first ESG Bonds Barometer publications, which reports on public trends, regulatory changes and interviews with relevant entities every quarter. The report aims to increase visibility of the considerations and issues surrounding ESG bond issuances.
Dechert: In February this year, as part of its “Growth for Impact 2024” strategy, Euronext became a founding member of Sustainable Trading, a non-profit membership network aiming to transform ESG practices within the financial markets. Please could you describe the aims behind this strategy and the impact Euronext Dublin expects this to have on brokers and trading members in the future?
Maurizio Pastore: Getting involved with the Sustainable Trading initiative from the start has been a strategic decision for Euronext. As a board member of this initiative, Euronext will be working in collaboration with the entire industry to drive positive ESG change by developing best practices, benchmarking and transparency, with a focus on how the financial trading industry builds, maintains, and operates trading infrastructure.
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Euronext Federal Model
Dechert: Euronext Dublin is part of Euronext’s wider federal model, including Euronext Amsterdam, Euronext Paris, Euronext Brussels, Oslo Bors and Borsa Italiana. What are the advantages to this model?
Maurizio Pastore: The federal model has allowed Euronext to leverage the different areas of expertise brought by the various jurisdictions and markets it operates in. The federal model represents the European ambition for different countries with diverse cultures that work together without being limited by geographic boundaries. We are uniquely positioned to support issuers and investors accessing our markets, providing unparallel domestic knowledge in each jurisdiction and global distribution with Euronext Dublin.
Dechert: What benefits does this federal model provide to Euronext Dublin and, more importantly, issuers that choose to list on Euronext Dublin?
Maurizio Pastore: An example of the benefits brought by the federal model is the recent integration of Borsa Italiana, which has brought increased market reach, technical expertise with regards to secondary trading and additional product types. The different market strengths of Italy, with its strong retail market, and that of the UK and Ireland, which is predominantly wholesale, allows the team to provide bilateral assistance in the areas of our respective expertise. With this unique local/global dimension, Euronext is consolidating a leadership position in the listing of ESG bonds and can offer a complete value proposition to debt issuers.
Dechert: How has Euronext Dublin’s operations and product offering changed since it became part of the Euronext group in 2018?
Maurizio Pastore: Prior to joining the group, the Irish Stock Exchange had already established a reputation as one of the leading markets for bond listings. This was very positive, but the market was also limited in terms of its product offering and scale. On becoming part of the Euronext family and rebranding as “Euronext Dublin”, it has grown in terms of market penetration, product diversity, influence and scale.
We are now operating in an enhanced exchange environment with multiple business lines, which is enriching our innovative thinking and opening cross-selling opportunities. Euronext is the undisputed world leader in debt listing, with potential for a vertical and integrated fixed income offering (primary listing, secondary trading and post-trade solutions). The transformation that we all face in terms of ESG conversion or technology disruption would have been too big to tackle alone, however, within Euronext these changes are exciting challenges which we look forward to facing together.
Dechert’s International Capital Markets Team would like to thank Maurizio Pastore and the team at Euronext Dublin for their contributions to this piece.
