You're listening to the OMFIF podcast, the show that explores the latest insights and discussions on global finance, economics, and policy for people who love staying informed about the rapidly evolving landscape of the financial world. Join us as we break down complex topics, interview key thought leaders, and provide essential insights to keep you informed about the evolving world of finance. Hello, and welcome to another podcast from ONVIF sovereign debt Institute. I'm Berhan Catboy, Head of Content at the sovereign debt Institute and I'm delighted today to be joined by Stefan NanHu, Head of Public Debt Management and state treasury at the Ministry of Finance of Romania. During this podcast, we'll be talking about Romania's recent debut green bonds and the key features of its green framework and transition plan and a look at what's ahead with its green issuance. Firstly, thank you Stefan for joining me. I think a good place to start is asking why Romania decided to issue a green bond. It might sound an obvious question, but every issuer DMO has their own specific reasons and strategy. Yeah, thank you so much. So, yeah, I think there are multiple factors that basically pushed us into, let's say, joining the sovereign issuers, the sovereign green bond issuers.

First of all, of course in the area, and not only the area but you know, generally globally, debt managers moved the word.

The CHG feature it bonds. Since, of course, there are clear ambitions at the government level. In basically most of the countries if not all the countries to set up clear

goals targets related to the emissions reductions to the issues that are, let's say, tackling with climate change, the effects of the climate change and so on and so forth. Romania is an EU country, of course, has very clear vicious, the entire line with European goals.

And it has specific

targets and strategies. Each of the European Union countries have long term strategy related to the emission reductions and

we have also ours that by basically 2031 We are phasing out the coal also by 2050. We are reducing

by 90%, if I'm not mistaking the the emission the carbon emissions from the from the 1990s levels. So there are all these all these made us two, of course, are you know, all those are translated into policies and strategies with clear objectives. Therefore, we will believe like, you know, many other issues in you that it is time to consider issuing ESG bonds since there are multiple projects and many projects and many European funds aligned to support these objectives. And, for example, in IRF, the resilience and recovery facility,

basically, about 40, close to 45% of all projects and reforms are related to clean to the climate change mitigation. And

therefore, we know that there are a lot of budgetary expenses that might be

that you know, might be used for our projects and we might allocate green bonds proceeds to them.

And of course, there is another important factor for us which is like day by day and year by year factor that leads us to diversify in instruments, which is the investor base diversification. We are trying to diversify into new areas, new investors to unleash maybe some existing investors portfolios that cannot be basically used for Romania's exposure because we are not teaching ESG we've got to thirdly, we've got a lot of requests and we saw how big would be the demand. If we will be considering such instruments like in virtually anything and interaction with investors we had requests or questions when I go into issue, why not considering

Romania is anyway placed well on ESG. So you should consider it and so forth. So

All these factors together, basically

put us in. I mean,

we're, you know, like leading us into hiring and considering creating the Greenberg framework first.

And we went through the whole process started in the last year, we discussed with the World Bank to have them on board as our advisor, because we wanted from the beginning to have the best standards in the in the framework. And we actually placed a lot the World Bank ta

on any single steps we need in creating the governance, the proper governance and the framework.

And we knew that we are embarking to a cumbersome and long term long time consuming process, time consuming process. And we started discussions with various line ministries to understand. First of all, the size of the projects, the the the number of the eligible expenses we might

have on the table, in order to assess a beat,

kind of three phase feasibility study,

to see how many eligible categories and eligible expenses we'll have ambitious, we could be in terms of green shade, and what will be the scale, what will be the scale of potential issuance, because it's very important to see

what will be the frequency you could aim for issuing the green bonds, because once you you are rolling this this ball, it's hard to stop it and there will be demand there will be expectations and there will be expectation not only from the investors, but this is a very hot topic and they I would say appreciated by the by everyone in the car team, from the from the political scene to the various stakeholders, academia, you know, the other potential green bond issuers from the municipalities, local governments, levels, corporations and so on. So, we are like a trend setter, here everyone was expecting the sovereign to do to do the step. And

when we understood that we could have

decent size and we could aim for being a frequent issuer, then we, we started building up all the elements. And of course, we we created the proper governance, we created an inter ministerial committee, we provided

space specific responsibility to this committee according to best practices, we then try to discuss with the with those line needs is specifically which was a very cumbersome work, going from a ministry to another we are discussing on the portfolio they have in the past, what are they aiming for the future, what kind of expenses they have, which do not have any other funding behind the behind the general consolidated budget, because that's a very important principle, you have to avoid duplication of funding. And of course, everyone knows that this ESG type of projects, the green projects are chased by by EU funds for a new country are chased by international financial institutions that are important financiers in car design Romania, like European Investment Bank, or ECB or you know, other entities. So, we put together a pretty nice portfolio of projects.

We started to work on the framework itself. we finalize it and then we also hired second party opinion provider in our case is Standard and Poor's. And we started the work with them actually, last year, if I'm not mistaking in sometimes in September, we started the work the I in September, early October. And we went through the process, again, a very, very time consuming process with a lot of interactions in which we had to evolve the line, nice ease as well, because there were many technical issues. It was a learning curve for us as well. I mean, it's we cannot pretend that we know much in the in ESG area in terms of like clear indicators, trying also to figure out in the future

or what would be the indicators that should be could be reported and so on and so forth? Yeah, no, I'm gonna ask you, Stephen, what sort of took so long? I think this has been in the works for a long time. And I think you've answered that, you know, it's, it's allowing different ministries. It's a whole new learning curve, because obviously, it's your first issuance in this ESG format. So I think you've answered that in terms of what took so long. And he also wanted to get it right. And

there was obviously, on the demand side that was always there. And around remember, we hosted a here on FIFA, a private roundtable with yourself and a couple of investors. And it was quite clear from from that point that there was a lot of demand, and you're in green issuance by Romania. And you mentioned about the framework, I guess another important part of terms of in terms of what took so long was getting the framework right, I think that was important, right? Could you sort of give us a quick rundown of, of the key features of that you mentioned the World Bank assistance, which you know, was very important in getting the framework, right, and the second party opinion, but perhaps you can just give us a quick rundown of the key features of the framework, and the transition plan, because there's quite a clear Transition Plan in this in this framework with Romania, and some of them, maybe just give us a highlight of some of the projects, you know, your green nations will finance as well.

Yeah, thank you for that. Yes.

I think it was, it was clear that actually, we had two alternatives and worked it out for the for the second one. First was to come with a very thorough and inclusive framework, like the sustainable bond framework. And to include we include in anytime ministerial committee, also the social limeys is like Ministry of Health, Ministry of Labor, Ministry of Education, and so on, and so forth. But we realized that those on those social area, we first of all, we didn't have a very clear picture of the project and you know, of the, the eligible expenses. And then we realized that it's much more, let's say, more concretely requirement, and much of yours, you know, the, the strategic documents related to the to the green area, and we decided to go with the green Warframe. So to basically to focus it a bit with the idea to expand it later on, when we will have more, more, let's say, inputs and more clarity in the social sectors. Therefore,

for the green, we for the green bond framework, we realize that actually most of the projects are within the DAR five five line ministries, Ministry of Energy, Ministry of Development, regional development, Ministry of Transportation needs of agriculture, Ministry of Environment, so

we try to be as inclusive as possible. So despite the fact that in some potential categories of eligible expenses, there were some risks embedded there. And we faced a lot of challenges from the SMP later on, when we started the SPO process. But we we wanted to show that actually, Romania is has a particular case, and it is important in Romania, for example, the transition in the transition from gas to hydrogen, we have to admit that we have this transition. So there are some risk embedded there, but that transition is very important for Romania. And therefore, although for example, the energy efficiency category of expenses is considered light green according to SMP capturing some risk in it will end also in terms of scale of the project is just I think about 7% of the total potential projects are within that the six 7% are within that category. We wanted to keep it to show that that's important for for Romania and to show to the investors that there will be achievements from that perspective of transitioning from gas to hydrogen, for example.

Then we most of the projects, I would say are staying within the two categories that were considered dream diary green, this is clean transportation, which is a chapter very important than the IRF where we have a lot of projects into the electric, electric electric railways, you know, the, the motorway, the Metro, the Metro base, building up the metro network in to or expanding the metro network in Bucharest and building up the metro network in inclusion Africa.

are the important projects in within VRF. very sizable ones. So about about 40 46% of the total potential eligible expenses are within the clean transportation that I consider diag mean, then we have a lot of projects in the regional and local government area where a lot of EU funds are channeled, and where we face a lot of natural disasters challenges. For example, there are a US that are affected by floods in Romania.

Also the droughts in the in the hot summers, it's something that caused a lot of, of losses to farmers, and also a lot of issues in agriculture. Therefore, irrigation projects are a large part of the potential projects to be able to get allocations from the green bond proceeds. Also, the the sustainable water management and waste management are the areas where the local governments needs are high. They're heavy you funds but they have also their own contributions. And

there are a lot of

expenses coming from the budget to cover to support those areas. There are some some programs national programs related to the local governments that

benefit by

benefit are benefiting. We have a lot of budgetary funds, and the we also supported those those those projects.

Thank you, Stefan. Yeah, that's a really good overview of the framework and the projects. Talking about the deal itself, it looked like a really good result, a really great result actually a 2,000,000,012 year bond that I think set a number of records, including the largest Euro denominated green bond by an emerging market issuer, as well as being remained is largest transaction in the international bond markets. Are there any other records I'm missing? There? Must be quite pleased with with the outcome of the of the transaction as well.

Yes, that's actually that that transaction proved that

you know, how, how long and what was the demand out there, you know, when it came

our first inaugural green bond,

it was the most successful the Euro bond deal for Romania so far. And that's proven by a number of records we we achieved with these transactions, just to enumerate several of them. So first of all, although we did many even people trench, euro bonds, this was the largest ever deal for Romania. It was the largest ever order book for Romania. It was the joint largest survey see Euro deal.

It was the largest ever emerging markets Euro green tranche towards the largest ever emerging markets Euro green order book.

And it was the largest ever see order book.

And of course, going into something that everyone is trying to to assess, let's say the achievements on the medium, these transaction came with the lowest Nisha premium ever for Romania. So and it was nice that we put it in a transaction in which we had a non agree in and agree, where the seven year long when we had the 12 year green,

where this deal came after a very impressive dollar deal in two tranches as well. And

then we could assess the price benefits. So on the seventh year, we should we achieved five basis points, minus five basis points and you should premium so we should inside the curve. On the fifth year on the 12th year, it was minus 15. And basically, based on this comparison, we came up with this assessment of the gaining 10 basis points. And basically we priced Eurocode. For Romania, we priced it. It was for the first time when we saw

in the in the time in the moment when we announced the deal, that the curves the Romanian curve didn't move. As you know, it was the case for other deals, beat upwards so it didn't move at all. And therefore we realized

As we will be able to achieve a medium and despite, you know, the, the guidance we had during your day or the book or the building of the order book. So

you know, we saw larger and larger demand so ended up with annoying more than 16 point 5 billion euros out of which more than 10 billion was on the, on the 12 year green tranche a lot of

ESG type of investor so we asked specifically to the to structure in banks we had, because we appointed to structure in banks in this transaction, HSBC, and Citibank. They also helped us a lot in the in the whole process, including here the process with the SPO, and building up the framework. And we asked them to assess the ground on it and the quality of the investors in the green trench. And we saw that, basically,

about the 45, about 45% of the investors in the 12 year, tranche. Were kind of Dykema di kg investor. So with very strong year, he,

let's say focus in their investments and policies and so on. We had also they assessed about kind of 20% also easy investors but rather lighter, let's say. So, we saw new accounts for us, we saw many, we saw many like formula like

official official investors like central banks, sovereign funds,

they good quality of the investors and actually many investors called us in the process and try to get a higher allocations. Yeah, and of course, we were guided through the allocation principles, first of all, ESG investors but also investors that are real money and loyal to Romania as well, we had even Romanian investors real money asset managers that started basically from that transaction to build up green or ESG portfolio. So while while they do not have

clear EEG mandate, they are that that's the beginning for them. So they started to see benefits in showing the reporting to the investors and to the to the for example, the patient years that are in there managing money for the for the patient funds, to show the investors are going into the arena into ESG projects into transitioning into having a greener Romania in improving the quality of the soil of the water,

and so on and so forth. So I think there are multiple benefits beyond the financial one.

And beyond those specific to debt management, which were obvious, I think we created now, we raised the bar a lot. So I don't know if we'll be able to achieve the same type of records for the for the second game, by the way, this transaction look like was just

exceptional.

Yeah, well, I guess that's, you know, I'm sure you show you'll be able to sort of keep those high standards and, and hopefully more and more records to come. You mentioned there that the gradient, it was quite interesting, because in you know, we've been hearing a lot in the SSA world, and I guess mainly in in sort of Western Europe about, you know, diminishing gradients, it's quite interesting to see that remain achieved quite a strong rhenium there with the 10 basis point cost benefit, I guess that's a reflection of the demand and the sort of, you know, the West is sort of waiting for this transaction. Is was the medium and is the gradient an important objective? Or is it is it like just like a bonus basically, or is it something important? Yeah, we we try to avoid in in all the marketing we didn't PR for, for the for the framework and the you know, for our initiatives of contemplating Renbourn. We've tried to avoid discussing too much bargaining because you don't know exactly if you if you'll obtain the green if you can really assess the greening.

And therefore, I think we put it more into the framework of that, you know, EP is a logical step that shows maturity for you as a salaried manager that aligns or Mania with other, maybe more sophisticated, more advanced

a

summer intern managers, that shows, again, we're Romania's commitments to the, to the ESG goals. And also, for the diversification of investor base, that we do a lot of other things that on the sake of diversification, we are contemplating this year, for the first time issuing samurai also, for the same for the same sake of diversification, we might consider even placing the green tranche in there, because we will now have Japanese, in some Japanese investors asking for green damage,

we might consider issuing the green room TV, so domestic domestic bonds, because in that way, we can build up local currency funding and attract more investors, there is anyway already a big reaction from the offshores offshore investors into our domestic market. So we might have benefits also on the consolidating or you know, tilting down the yield curve, or expanding the yield curve in some maturity points where it will be high that without such a billing instrument, so we spoke more about qualitative issues, then about green, but we ended up with a very concrete Green Room, which, of course, is nice to have a nice situation. But we will never try to say that we will always obtain and then we will have a failure, if, for example, at some point to issue a green bond, and it will be hard to prove.

Yeah, okay. Thank you. And I guess, you know, rhenium is quite theoretical. And it's, as you say, it's sometimes hard to prove. But anyways, a good start anyway, to to to have to have a solid green in there for your first issuance. Just looking ahead in terms of your green issuance going forward? Could you give us an idea of whether you'll be a regular issuer? Will there be, for example, a new green bond every year? Well, what's the sort of? What's the sort of plan for British ones going forward? In terms of your annual funding program? Yeah, on this one, we immediately after we ended up that, we close the transaction,

we called for any type ministerial committee, first of all, to thank them very much for all their support, then to start already discussions on the allocation and to organize the processes. So, the allocation is, is

at least the same important processes, it was the you know, building up the framework and transaction was quite smoothly and just, you know, timewise was very short. I would say,

though, very successful.

And, you know, we did a lot of work that helps us already in the allocation, we have already a huge spreadsheets with, with all the projects with projects and expenses year by year, you know, our framework allows us to refinance some of the eligible expenses on a three year backward basis, the current year, plus fewer fear for looking

from the from the timing of the transaction, and we apply the portfolio based approach for the allocation. Even for the allocation, we we will ask SMP, also to

provide us their they view their assessment, their opinion on the allocation report, which is also because we want to want to show that we are doing everything according to best practices. And we'll do that further gone for the Impact Reporting, which will be the next step after the allocation.

So depending on that, and depending on on how many instruments in instruments we want to launch, because now, one should be mindful, of course, one, it is a trade off between

the number of the green instruments we're gonna deploy, and the frequency of

the issuance. So I think for us, it's more important to be frequent to be able to issue let's say, at least yearly green instrument, then for example, to do large size because in this 30 year green bond, we were asked if we can consider upsizing so and it was very tempting because we knew that we could upsize in very good terms. But on the other hand, that will tie our hands of

being able to to be a frequent t shirt because 2 billion euros is

is not is not a tiny amount. And we need to put a location for that, if we will consider maybe a green tag for the summer I have code that's much smaller, but that's eating up again from the space, if we'll be considering a green domestic that will be eating because that will be tapped until we will reach some liquidity and that will eat up again from that, then we might end up that will not be able to do the next green uribl next year, if we do too many, and life size. So that's why we have this continuous continuous process with alignment is to assess to assess

the potential scale.

And effect we'll see some limitations. That's why we have then the alternative of expanding the framework expanding the framework into sustainable one framework. And adding up also those those categories of eligible expenses, the tide not framed as green, but they are good enough for sustainable Warframe. And the Romania has a lot of, of challenges in the famous social area, as you you might know. And we can easily find there some good, good expenses. It's also even when we discuss about green, green eligible expenses, there were few categories. I will name one, it was about the breeds of some, like cow breeds in some regions of Romania, that shows the traditional and some some very special species, let's say we have, but where, you know, we are proud about this project in agriculture, there is a lot of traction among the farmers, but was considered not as a green project by SNP then we developed it, although even the world bank so that is but you know, SNP said look, we don't see anything green in that. So we do update. But that's very clear cut Good, good category for the sustainable bond framework. So we might contemplate the expansion of the framework maybe next year, not this year, maybe next year. And then again, we'll go through the same cumbersome process with again, you know, building up expanding the framework getting VSP opinion, and so on and so forth. But now, because we enter into this category, we I mean, we know that it's not reversible, and we should continue it. And we

we created some, some expectations. Okay, thank you. Yeah, that was my next question will be whether you would look at other ESG type products, and oh, this is at the moment of greenbone framework or strictly greenbone framework, but it's good to know that you might, you know, consider expanding it for Yeah, into it into a broader sustainable framework. What about products like sustainability link bond? Was that something that you looked at? Or is that something that you could look at in the future?

We didn't look to that, into that. So honestly, speaking, the NF actually, if you see in Europe, there is not much evidence on that.

So I think, maybe in some other parts of the world, I saw that, you know, in South America, there were a couple of successful deals like why if I'm not mistaking with Chela, also, on the one hand, it gives you a bit more flexibility, because you don't have the same the same process like in a good bond framework that you are assessing any single expense and correlate allocate the proceeds. So it gives you more flexibility from the liquidity management viewpoint and the use of proceeds. But on the other hand, it creates this I would say very clear correlation with some targets,

even in terms of interest rate costs associated to the interest rate costs associated to these sustainability linked or

bonds, which might create, let's say some, some issues. So at this point in time, we are not contemplating to moving to those issuances. But you never know. So we might, for example, if we would see also investors from our discussions,

most of them, they like more pure, let's say classical green bonds, rather than sustainability models. Because for them that's more calm for it that their money or

During and are allocated for very specific new projects for sustainability linked, yeah, it is correlated with the achievement of some targets, but there is no clear correlation between their money and being projects. Yeah, I think that those are, those are third points about the about the sustainability link bond market. I think it's really good to see Romania do do a green bond. We've heard through our workshops, we've heard we've hosted as you know, regional workshops, focused on ESG issuance. And one thing that has come up is from investors is on the need for the C region to sort of step up with ESG issuance. Just why do you think the region has been perhaps slower than others to sort of to do agree in an ESG bonds? I think,

honestly, speaking,

it's not a nice job for the manager. And actually, if you ask them managers is not the, let's say, these two men, they really favor.

But

we realized that actually, it's something it's something that at some point, once any hair was in the in the summer, in the management area, you have some project summary forms you are contemplating to. So for Romania, there were various I mean, every year we do something, and it's not easy. We are a debt management office, that inside the Ministry of Finance, we have a lot of implications in many areas related to almost any like we have the government programs. For the status schemes, the guarantee, the state warranty schemes we have or implications, there were these three key periods with COVID pandemic context, then, it was the war in Ukraine that created the need for supporting the market supporting so we've been involved in many areas. And you have to be mindful about the resources. And this is a project that requires a lot of resources, honestly, speaking, requires a lot of resources, a lot of time, we had a devoted team that worked intensively to these projects.

Therefore, we took one by one and this, this was the time when to consider that. That's a proper moment. To to go for it.

Yeah. Okay. Thank you. Yeah, I think that's, that's a really good point. I mean, it's, you can't really sort of undermine the sort of the effort and hard work that is required to set up a green framework. So thank you for that. And thank you, Stefan. Well, we'll leave it there. Congratulations on remainers. David green bond and good luck for the year ahead and with your with your future green assurance. And for our listeners and network, we are delighted to announce that we'll be hosting our inaugural global sovereign debt forum on June 20. In London. This is a new flagship event by on Fifth sovereign debt Institute to convene demos from across the Sea region, Middle East Africa and Asia along with MDBs and investors, it will be a truly global event, shining a light onto the far orthophosphate. Advancing and growing economies discuss ESG issues, but also market conditions, and how sovereigns in the regions are developing the investor bases. Please do check out our website for more details and to register. We already have a number of issues, and Deimos confirmed to attend including Romania, Ukraine, the Philippines and others. That's it for me many thanks for listening. Thank you for joining us for this edition of The on Fifth podcast. If you found today's conversation engaging. Make sure to stay tuned for additional thought provoking discussions on emerging markets and European government bond markets by subscribing to our channel. Stay connected of the latest developments by following us on our LinkedIn page on Fifth sovereign debt Institute.