NEW YORK: T. Rowe Price Group Inc is targeting a corner of the sustainable debt market that it sees growing fast over the next decade: blue bonds.

Blue bonds are debt instruments issued by companies or financial institutions to fund projects that help protect or revive the world’s oceans and waterways in the face of climate change, over-fishing and pollution.

The market has risen to about US$7.2bil since the first blue bond was issued six years ago by the World Bank.

It’s now poised for further gains, said Willem Visser, emerging markets and impact fixed-income portfolio manager at T. Rowe Price.

“We’re at the inception point,” Visser said. “The goal now is to strip water-focused projects from the wider US$4 trillion market for green bonds and develop a dedicated asset class.”

A total of 53 blue bonds have been issued since 2018.

The bonds vary in size from a US$12.8mil offering from Indonesia to a US$750mil instrument issued by Hong Kong headquartered Seaspan Corp to help the company decarbonise its fleet of ships.

Almost half of the blue bonds issued to date have originated from Chinese entities.

T. Rowe Price teamed up with the International Finance Corp in November for a fund dedicated to emerging market blue bonds.

T. Rowe Price said at the time that its emerging markets blue economy bond strategy expected to raise more than US$500mil within a year of launch.

The fund is targeting annual returns of as much as 500 basis points above the three-month US treasury bill.

Visser said T. Rowe Price has about a dozen blue bonds in its pipeline and expects to close up to four of them worth roughly US$2bil in total before the end of next year.

The prospective debt sales include instruments issued by water utilities in Brazil, chemical companies in Asia and financial institutions in Latin America.

T. Rowe Price also is exploring opportunities around irrigation projects in Botswana and Zambia, Visser said.

Issuers can tap the blue bond market to access new sources of impact-orientated capital they otherwise might struggle to reach and first movers will likely benefit from favourable funding costs, Visser said.

There’s one corner of the blue bond market that T. Rowe Price is avoiding: debt-for-nature swaps.

One of Wall Street’s hottest environmental, social and governance trades last year, these deals bring in institutional investors to help countries refinance their debt and then put any savings towards conservation programmes.

The product was pioneered by Credit Suisse with a US$364mil deal for Belize in November 2021.

The Swiss bank has since done swaps in Barbados and Ecuador, both prior to its takeover by UBS Group AG, while Bank of America Corp completed a US$500mil deal for Gabon last year.

The bonds issued to finance debt-for-nature swaps have in the past been labelled blue because of their ties to marine conservation.

But Visser said they don’t merit that label because the bulk of the proceeds are used to finance the debt conversion, with only a sliver of the funds designated for nature projects. It’s a concern shared by Barclays Plc analysts.

The International Capital Market Association, the most widely followed global standard setter in the debt markets, has said the blue-bond label should only be used if 100% of the proceeds are allocated for marine conservation projects.

 - Bloomberg