Throughout the pandemic, transitioning to a low carbon, resilient economy that also promotes an inclusive recovery and social welfare have ascended investors’ and issuers’ agendas.¹ So when mortgage lender Unión de Créditos Inmobiliarios (UCI) – a Santander-BNP Paribas joint venture –  looked to play its part by helping people become homeowners under environmentally-friendly considerations, it launched a securitisation to fund energy efficient residential buildings and renewable energy projects in Portugal and Spain.

Many residential buildings in these two countries were built more than 50 years ago, when the concept of energy efficiency in housing was unfamiliar.² Today, however, the demand for homes that meet or can potentially meet certain green criteria in their energy usage grows steadily.³ To help meet this demand, and to bridge the gap between old and new, UCI launched its first green residential mortgage-backed securitisation (RMBS) Green Belém No.1 (Green Belém).

The €385m issuance, secured over owner-occupied residential properties in Portugal, is one of the latest mechanisms through which UCI is embedding environmental, social and governance (ESG) concerns into its core lending activities. It contributes towards the rehabilitation and renovation of properties under sustainable, energy-efficient, and environmentally respectful criteria, while providing risk advice to homebuyers, and broadening access to home ownership.

Specifically, the company is developing mortgage products that encourage the purchase of energy-efficient homes and loans that enable the purchase and renovations of homes to improve their energy efficiency. It also integrates ESG risk concerns into its origination policies, including low-carbon transition risks, and translates them into financial risks. For example, the less carbon neutral the building, the less favourable the mortgages terms.

UCI’s Deputy CEO Phillipe Laporte believes that this integration enables the company to adopt a long-term approach with the customer, where it is not only advising them on the risks of home-buying and taking on a mortgage, but also the financial benefits of owning an energy efficient property. “Recognising that many houses were built a long time ago with no thought of improving them or saving the planet, we can provide borrowers with either cash or equity to improve the energy efficiency of their house,” he says.

UCI is also partnering with other stakeholders in the mortgage industry to further its goals as a sustainable and responsible provider. “As a responsible lender, we're meeting transparent criteria by communicating to our customers using an innovative approach to co-creating products,” says Laporte. “That means that with three quarters of our mortgage granting and distribution done through intermediaries or real estate agents, we align with them on type of housing they want to sell and types of mortgages we’re prepared to give based on the customers, the houses and the neighbourhoods they’re in.”

In order to better define its sustainability ambitions, UCI looked to the debt capital markets and developed a green bond framework, which supports the mobilisation of debt capital to sustainable and environmentally beneficial purposes. The framework establishes a programme for the issuance of green finance instruments, including green bonds (such as Green Belem), green private placements and green loans. By using the proceeds to finance or refinance, in whole or part, the acquisition, development and refurbishment of energy efficient residential buildings in the Spanish and Portuguese real estate sector, UCI aims to meet its specific goal relating to sustainable products.

Under the framework the company intends to allocate €47.5m to its green range of products, of which 93.7% will be in Spain and the remainder in Portugal in 2020. The lender targets an increase of 73.3% in the amount of proceeds allocated to its green range of products, or green investments, between 2020 and 2025. The total is expected to be €325m, mainly focusing on the green acquisition and refurbishment (of homes), which represents 76.9% of the funds committed. Over the five-year period, 94.3% of the proceeds are due to be allocated to projects located in Spain and 5.7% in Portugal.

Second-party opinion provider Sustainalytics deemed the framework’s environmental credentials to align with the four components of the International Capital Markets Association’s Green Bond Principles 2018 (which covers use of proceeds for sustainable activities geared towards carbon reduction⁴): Use of Proceeds, Evaluation and selection process, Management of Proceeds, Reporting and External.

The investments of proceeds are also aligned with the European Mortgage Federation’s (EMF) Energy Efficient Mortgages Initiatives (EEMI)⁵ (see Figure 1) a market-led initiative signed by more than 67 lenders,⁶ which devises a framework to channel private finance towards investments in energy efficient buildings and energy saving renovations in committing to a low-carbon and sustainable society.⁷

Under the initiative, borrowers are incentivised to improve the energy efficiency of their properties or to acquire highly energy efficient properties, through favourable financial conditions linked to the mortgage. These initiatives will also help to ensure that the recovery from the Covid-19 pandemic is “green” and will contribute to the NextGenerationEU vision.

As one of the EEMI-EMF lenders, UCI incentivises borrowers for purchases that satisfy these conditions for loans that are considered as green (no origination fees, and a reduction in the spread/interest rate) and a reduced deposit (less 5% of the property value) for new buildings.

For these mortgage loans, UCI has developed a dashboard to control the volume of earmarked green projects, the savings of the energy consumption (kw/hr); the average pricing of the operations, its profitability and performance of the portfolio (loss given default; probability of default; exposure of default).

UCI will report the allocation of net proceeds of issued green finance instruments to investors, including the total outstanding volume (in EUR) of green finance instruments issued under the Framework (see Figure 2), the allocation of the net proceeds of issued green finance instruments to a portfolio of Eligible Assets (or expenditures), including a breakdown of allocation to the specific Use of Proceeds on an aggregated basis and the value of unallocated proceeds (if any).

In addition, UCI will report on relevant impact metrics, such as the EPC label composition of the portfolio, estimated energy savings in kWh and examples or case studies of eligible assets.

“RMBS Green Belem No. 1 is the perfect project for aligning financing with mortgages that meet our responsible and sustainable lending criteria”
Philippe Laporte, UCI

With the framework’s designation of green bond issuance proceeds towards the development of mortgage products, Laporte describes RMBS Green Belém No. 1 as the “perfect project” to align financing with mortgages that meet its responsible and sustainable lending criteria. “To achieve this alignment, it was not just about using proceeds from the securitisation to provide mortgages that met energy efficient criteria for renovation and building (green mortgages),  but the issuance also had to be qualified as safe, transparent and simple (STS) as per EU Securitisation Regulation.”⁸

Issued in April 2020, Green Belém was thus the first RMBS to qualify as STS and was issued by TAGUS, a Deutsche Bank-owned special purpose vehicle. The proceeds are being used to provide mortgages loans (“green receivables”) that incentivise borrowers who make energy efficient purchases or renovations in Spain and Portugal. Commenting on the novelty of the instrument for the market, Laporte explained that “when we started building the approach towards funding sources that used different instruments such as RMBS, it had to be STS-based.”

This also enabled UCI to diversify its funding sources away from the Spanish market, where it is a frequent debt issuer (having issued its first green mortgage in 2018), and target a wider pool of investors by diversifying its sources of proceeds towards energy. For this purpose it is channelling proceeds towards products that will finance a diverse range of housing, including those with Energy Performance Certificates EPC⁹ (See Figure 3).

In line with the green bond framework, UCI is using the proceeds from the RMBS issuance - comprising €331.3m of class A notes due, €25.5m of class B notes and €35.2m Class C Notes (all falling due on March 2063 if the five year-step call is not exercised) to originate green receivables, or mortgage loans for residential properties that satisfy the Climate Bond Initiative’s¹⁰ sector-specific criteria for low carbon buildings within five years of the issuance date.  UCI will offer four different product lines: green personal loans for the refurbishment of condominiums; green personal loans for the refurbishment of individual properties; green mortgage loans for newly built properties (energy classes A or B); and green mortgage loans for existing properties (purchase and refurbishment).

To support the inflows of capital market debt into these products, UCI entered into a partnership with European Investment Bank (EIB), whereby the supranational lender is investing up to €100m in the senior tranche of the RMBS¹¹. UCI’s alliance with the EIB to finance green investments in the Iberian Peninsula, specifically to renovate the real estate buildings and to boost the construction of nearly zero energy buildings¹², originated in 2019 when UCI launched its green mortgage loans branch. “Our collaboration with the EIB under the EEMI-EMF project will allow us to continue promoting energy efficiency and more sustainable homes in both Spain and Portugal,” says Laporte. “With the EIB’s involvement, the green bond provides us with the “perfect vehicle” through which we could reinvest the proceeds of the issuance in green housing.”

But this involvement did not guarantee plain sailing. Being the first securitisation to be labelled STS under the Securitisation Regulation required skill and coordination across multiple fronts in submitting the draft prospectus to the regulators the Portuguese Securities Market Commission CMVM in January 2020 and the Bank of Portugal/European Central Bank in March 2020) . “We had to ensure that the regulator, the ratings agencies (Fitch and DBRS) and structurer and all actors in this deal – Deutsche Bank and its issuer Tagus – were aligned with our project and the STS framework, by the targeted go live date of end of March 2020.”

And that was the easy part. Green Belém came to market at the onset of the Covid-19 pandemic in April 2020, only two weeks after its initial timeline, as states of emergency were being declared around the world. “When Green Belém was first envisioned back in 2019, we didn't know anything about Covid-19, nor that the market would be locked down,” recalls Laporte. The pandemic prompted UCI to delay the deal by one month, to April. “We needed to be sure that all the people involved in this deal were safe at home and could give the green light for it to go ahead,” continues Laporte. “That’s why the placement of this deal had a tremendously positive outcome despite strong headwinds.”

Against these challenges, UCI sought new ways to engage investors given that mid-March 2020 was not a good time to go to markets as they were all locked down. “All the investors had gone home and when we rang there was no answer,” says Laporte. “We therefore agreed with the deal structurers and the EIB that instead of postponing until after the summer as we didn’t know if things would get better or not, to do this as a private placement with a couple of investors. They knew the portfolio very well and agreed on the pricing and the stake they would take”. In addition, ratings agency Fitch noted a credit enhancement, positive selection of the portfolio, the fully sequential amortisation of the notes and the low-interest-rate environment as mitigating factors in its report on the deal.¹³

Despite the odds, Laporte says Green Belém benefitted from the green bond framework’s alignment with the EEMI-EMF, the lenders portfolio and its ESG goals. “Through this combination of elements, we have been a pioneer of the initiative and we’re proud to see companies using it,” beams Laporte. “It shows what can be done in the industry with co-ordination and collaboration, despite the Covid-related challenges and the fact that it needed political buy in and alignment with various actors.”

With this combination, RMBS Green Belém 1 was awarded Portuguese stock exchange Euronext Lisbon’s Sustainable Finance award¹⁴. Laporte reflects that winning this award provided the lender with the visibility as a pioneer of an original transaction that was completed in a challenging global environment. “Although we are well known in the RMBS market in Spain with our RMBS Prado Programme¹⁵, Green Belém provided UCI the opportunity to demonstrate its commitment towards green assets,” he notes.

Laporte concludes that Deutsche Bank’s platform for issuer services also helped the issuer to provide the necessary transparency and reporting to investors. It thus further enabled UCI to integrate ESG into its core activities. “When you do a deal, you put it in place and it’s reported. You have to set the cash flows and do the reporting so speed and quality of the reporting to investors are of the essence,” he adds. “In this vein, we’re very satisfied with the work Deutsche Bank has done behind it and the collaboration we have with the bank through the Tagus special purpose vehicle.“

Sources

¹ See How ESG grew up through the pandemic at flow.db.com
² See https://bit.ly/3wk1B71 at eppedia.eu
³ See https://bit.ly/2SNAxze at statista.com
⁴ See https://bit.ly/3dtAkYM at icmagroup.org
⁵ See https://bit.ly/2VcWQiP at energyefficientmortgages.eu
⁶ See https://bit.ly/2UvjAKE at eemap.energyefficientmortgages.eu
⁷ See https://bit.ly/2VcWQiP at energyefficientmortgages.eu
⁸ See https://bit.ly/3hlwvra at arthurcox.com
⁹ See https://bit.ly/3hjECVr at ec.europa.eu
¹⁰ See https://bit.ly/3qVRyUzY at climatebonds.net
¹¹ See https://bit.ly/39140xW at iberian.property
¹² See https://bit.ly/3wl5VTA at eib.org
¹³ See https://bit.ly/3wkX9VJ at fitchratings.com
¹⁴ See https://bit.ly/3xofe6k at euronext.com
¹⁵ See https://bit.ly/36fBTpz at ashurst.com