Caja Rural de Navarra is set to launch a debut sustainable cédulas next week, but with no commitment to sustainable cover, the issuer and others have played down its status as a “sustainable covered bond”, while Bank of China’s recent use of the “covered” tag has also drawn criticism.

Caja Rural de Navarra (CRN) announced the mandate for its deal on Monday of last week (31 October) and has been holding a European roadshow ahead of the planned sustainable cédulas hipotecarias issue – the proceeds of which will be allocated to projects focused on environmental sustainability and creating a social impact in local communities.

Miguel García de Eulate, head of treasury and capital markets at Caja Rural de Navarra, said the deal will be a “use of proceeds sustainable bond”, noting that a framework is in place that specifies what kinds of loans and projects the proceeds can be allocated to. The issuer has a commitment to ensure that its overall loan book will always contain sustainable loans in an amount at least as much as the amount of sustainable covered bonds outstanding, but there is no such commitment in relation to the cover pool.

“It is true that a relevant proportion of this category of sustainable loans are also included in the cover pool because they are also mortgage loans – for example social housing, or some SME loans – but this is a secondary fact,” García de Eulate told The Covered Bond Report.

“I still think that you could name it a ‘sustainable covered bond’ in the sense of the nature of the use of proceeds of the bond, but it is also true that the cover pool – which consists only of mortgage loans – will contain a sizeable amount of sustainable loans, even above the size of the new ‘sustainable bond’.”

Some market participants have gone further and said that it would be inappropriate to characterise the deal as a “sustainable covered bond”.

“I wouldn’t say anything against issuing such a sustainable bond,” said one banker who has been involved in previous issuance, “and I’m very sure that they have done a lot of work in setting up this structure, and obviously they are engaging in projects that are valuable from an environmental or social point of view. And – unlike Bank of China’s deal – it does at least have the structure of a covered bond.

“But what have the two elements – sustainability and covered bonds – to do with each other here? This link is missing.”

He noted that the three previous issues in the field of socially responsible investment (SRI) – from MünchenerHyp, Berlin Hyp and Kutxabank – have all had a commitment to maintain sustainable assets in the cover pool to at least the value of the covered bonds outstanding.

“What is a covered bond? It is a bond covered by eligible assets,” he said. “Of course, you can use the proceeds of issuance for anything, but there is no commitment in this case to generate new sustainable eligible assets.

“This is one of a weakness of this bond. It is a little bit strange.”

The lack of clarity over what should appropriately be termed a “sustainable covered bond” comes on top of disagreements in the wider sustainable and green bond market over just what should qualify for such labels. The European Mortgage Federation-European Covered Bond Council (EMF-ECBC) is already involved in an Energy Efficient Mortgages Initiative, but in light of the latest developments some market participants have called for further work on creating a market standard for sustainable covered bonds going beyond simply defining eligible collateral, in order to avoid confusion among investors.

Bank of China sold a $500m deal on Thursday of last week (3 November) that it termed a “green covered bond”, but although dual recourse in nature and borrowing some structural elements from covered bonds, its claims to be a covered bond were greeted with scepticism by many market participants.

“I really wonder why the investment banks who worked on that deal didn’t put a little bit more pressure on the issuer not to use this label,” said one.

Caja Rural de Navarra sees chance to tell its story

García de Eulate said Caja Rural de Navarra has been holding internal discussions about the possibility of launching a sustainable covered bond for some time, and was encouraged to advance its plans after observing the development of the overall sustainable bond market. He cited Spanish precedents such as a covered bond issue from savings bank Kutxabank and “social bond” issuance from Spanish government agency Instituto de Crédito Oficial (ICO). In September 2015, Kutxabank sold the first and to date only non-German covered bond in the field of socially responsible investment (SRI), a Eu1bn September 2025 issue that was backed by social housing loans.

“We are a co-operative bank with a presence in the regions of Navarre, the Basque Country and Rioja, while Kutxabank is a savings bank based in the Basque Country,” said García de Eulate. “We are based in Pamplona, and both Navarre and the Basque Country have a similar economic structure, with a very industrialised and export-oriented economy.

“Therefore, we were very interested in their social housing bond, and we thought that – as we are a small bank and not so frequent in the market – a deal like this would give us the opportunity to increase awareness about our bank, especially because we know that investors are more and more interested in these kinds of social or green bonds.”

García de Eulate said Caja Rural de Navarra expects the deal to improve and broaden the bank’s investor base, reaching sustainable and socially-orientated investors in particular. However, he said the deal had an added benefit of shining a light on some of the bank’s activities in its home region.

“Caja Rural de Navarra has three features that define us – we are a co-operative, we are regional and we are retail,” said García de Eulate. “One side of this sustainable covered bond exercise, which for me is very important, is that it helps us as a bank to understand what it is we are already doing, and helps us to better explain this to our investors, to our regional retail clients and even to our employees.

“You discover after an exercise like this that you are already doing a lot of good things that are linked to your region and linked to your customers, with a long term, sustainable perspective. This exercise is therefore investor orientated but also inward-looking and directed to our local market, in a way.”

The roadshow is concluding today (Friday), and García de Eulate said that the deal will probably be launched next week.

“It would be the natural thing to do, subject to market conditions,” he said.