Green automotive bonds suddenly trading at spread pick-ups
We have seen greeniums on bonds issued by VW and Mercedes Benz in the past. However, currently that the majority of these issuer’s green bonds strangely trade at a pick-up to the regular bonds. Although BEV sales at both issuers have not surged, the carbon reduction impact vs petrol and diesel cars should resonate in bond pricing as well.
We have seen greeniums on bonds issued by VW and Mercedes Benz in the past
However, currently we see that the majority of these issuer’s green bonds strangely trade at a pick-up to the regular bonds
Although BEV sales at both issuers have not surged, the carbon reduction impact vs petrol and diesel cars should resonate in bond pricing as well
VW and Daimler BEV sales do not take a flight, like Tesla
The chart below shows global BEV (battery electric vehicle) registrations from the EUR automotive green bond issuers VW and Mercedes Benz (MB), against Tesla in 2021 and 2022 (until Q3). Clearly VW has not taken a big step in growth like MB or Tesla, but also in terms of scale Tesla continues to stamp its authority over both German names. The green bonds issued by VW and MB were designed to be used in the ramp-up of BEV production.
Could this then be explained by the fact that the majority of green bonds issued by VW and MB suddenly trade at a pick-up to the regular bonds, as investors are perhaps already discouraged by the fact that BEV sales are not ramping up to Tesla’s level? The chart below shows how far the various VW and MB green bonds are trading from their regular bond equivalents, in spread.
Greenium still justified
However, if VW and MB fail to make impression on their BEV sales vs peers, should that not mean that the green bonds need to trade at the same level as the regular bonds? Furthermore, we still see a growing share of BEV sales at both manufacturers, which implies that each car put on the road should theoretically be reducing greenhouse gas emissions in comparison to regular petrol powered cars. For example, the picture taken below from VW’s latest green bond impact report shows how much the full electric ID3 compares against a Golf TSI or TDI in terms of lifecycle carbon emissions on a gram per km level. While the ID3 clearly emits more carbon during the production phase, this is more that outweighed for during usage phase based on the emissions profile of the EU-27 electricity mix.
MB has similar green bond reporting and claims 24 metric tonne CO2 savings from its EQA model against a petrol powered GLA on a 200 thousand kilometre lifecycle. When we take the general assumption that these levels of carbon savings are available across all of their BEV models, it allows us to calculate the cumulative emissions saving potential for VW and MB BEV vehicles produced since 2020, as shown in the table below. Given VW’s larger scale compared to MB the cumulative savings are obviously much more. However, VW has issued more green bonds in comparison to MB, suggesting that the emission reduction potential per EUR financed is lower at VW vs MB. This final assessment still has flaws as we also require other sources of finance in the BEV production facilities, which we unfortunately do not have. Still, given the carbon reduction potential shown, the issuers’ green bonds should certainly not trade at a pick-up to the regular bonds. A return of the greenium should be on the cards.
