Ace of Basis: Green cash-CDS basis to drive transition

8 minute read

Green negative basis packages, whereby an investor buys a green bond of a company and buys protection in CDS to hedge out the general company risk, are a strategy to drive relative funding costs for green bonds tighter, without an explicit position to the company’s credit.

There are currently attractive entry opportunities, which makes this a cost-efficient tool to drive transition. Traditional negative basis trades are used not to express a directional view on a credit but to take advantage of bond technicalities.

Similarly in the context of a green bond, an investor can buy “the green bit” of a company they do not like from a fundamental standpoint without exposing themselves to the credit per se.

We illustrate the concept by looking at the recent GM green bonds issued with a significant negative basis, meaning that the bonds have a wider spread than the equivalent CDS.