Next week's planned $500 million green-bond issuance by New York's Metropolitan Transportation Authority is significant on several fronts, said a capital markets climate change expert.
"This is a fantastic move by a municipality or a government-sponsored entity to use green bonds for infrastructure improvements," said Alan Rubin, a managing director at Tigress Financial Partners.
The MTA, one of the largest municipal issuers with roughly $36 billion in debt, intends to offer its inaugural green bonds in a two-day order period starting Feb. 17. The authority was scheduled to begin a marketing campaign on Thursday.
It is the largest U.S.-certified green bond to date and the first U.S. municipal bond to be certified under new international criteria for investment in transport infrastructure compatible with a 2 degrees Celsius warming outcome.
"They're using a standard that has been accepted," said Rubin, who helped design and underwrite the catastrophe fund for storm relief for Lehman Brothers in 1992 after Hurricane Andrew struck Miami-Dade County, Fla.
Climate Bonds Initiative, a London-based, not-for-profit organization, has certified the bonds. The group supports financing worldwide for projects that help reduce climate-change effects. Called Transportation Revenue Green Bonds, Series 2016A, it is the first bond issuance CBI has certified in the U.S. under its low carbon transport standard.
"This MTA bond issuance is a milestone in the inclusion of rail transport in the burgeoning green bond market," said the group's chief executive, Sean Kidney.
Ramirez & Co., a member of MTA's approved pool of book-running senior managers and a New York State certified minority-owned business, is offering the bonds. Drexel Hamilton LLC., a service disabled-veteran owned business, and Stern Brothers & Co., a women-owned business, are special co-senior managers. Both are also state-certified.
Proceeds will pay for continuing work on infrastructure renewal and upgrade projects on New York City Transit, Long Island Rail Road and Metro-North Railroad that the MTA begun during its 2010-2014 capital program. The bonds will retire Series 2015A transportation revenue bond anticipation notes.
"We know that our network of electrified rail services is efficient and directly results in carbon avoidance," said MTA finance manager Patrick McCoy. McCoy and assistant finance director Marcia Tannian briefed board members about the pending green sale at their last two monthly meetings.
According to Climate Bonds Initiative, $41.8 billion in green bonds, also called climate bonds, were issued in 2015.
"There's a lot of pent-up money waiting to be tapped," said Rubin, who helped design and underwrite the catastrophe fund for storm relief for Lehman Brothers in 1992 after Hurricane Andrew struck Miami-Dade County, Fla. "The MTA is setting the tone and not just doing it as a fad."
Loosely categorizing bonds as green -- a practice Rubin called "greenwash" -- risks generating a backlash. "That's how people push back," he said.
Rubin also called the MTA's move significant, given Tuesday's U.S. Supreme Court ruling that shelved President Obama's climate change regulation, pending the resolution of legal challenges by several states. Advocates worry that the top court's action could jeopardize the December international global warming accord achieved in Paris.
The MTA is issuing the bonds under its workhorse transportation revenue bond credit, which is backed by MTA's operating revenues and state subsidies dedicated to the MTA. TRBs account for 61% of the authority's portfolio, according to its year-end report to the board in January.
The credit includes a gross pledge of all pledged revenues to fund debt service requirements before being available to pay for operations. Kroll Bond Rating Agency rates them AA-plus. Standard & Poor's and Moody's Investors Service assign AA-minus and A1 ratings, respectively, while Fitch Ratings assigns its A rating.
It will pay interest at a fixed rate, with interest payments made every May 15 and Nov. 15. The interest rate and final maturity date will be set in the coming week. Interest on the bonds is exempt from federal, state and New York City personal income taxes.
The MTA syndicate of board-approved managers will also work on the transaction.
