Issuers Attract Crossover Buyers With Green Bonds

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The New York State Environmental Facilities Corp.'s $213 million bond sale earlier this month showed that green bonds offer issuers an opportunity to diversify their investor base, bringing in buyers who don't typically purchase municipal bonds.

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The NYS EFC green bonds were the first to be issued under the Green Bond Principles, a set of guidelines that have been endorsed by about 25 banks since they were announced earlier this year. The proceeds will be used to finance 128 drinking water and wastewater infrastructure projects across New York State, with the help of EFC equity.

"With the EFC issuance, there were several investors new to EFC that participated in the transaction specifically due to the green bond designation," Jamison Feheley, managing director of public finance banking at JPMorgan Securities LLC, said in an interview. "Our issuer clients look for a diverse investor base; we're currently educating investors about the guiding principles so they are aware of these options as new issuance enters the market."

Green bonds' proceeds go to projects with environmental benefits. The first green bonds were issued by World Bank in 2008, Heike Reichelt, head of investor relations and new products capital markets department at World Bank, said in an interview.

"The reason we developed the green bond product was because investors came to us and looking for this type of product," Reichelt said.

When World Bank issued the bonds, it was approached by investors who had not previously bought World Bank bonds, said Reichelt. A recent study conducted by World Bank showed that 60% of investors that had bought World Bank's green bonds had not previously bought its bonds in the primary market.

"It benefits the issuers - we expanded our investor base and reached new investors," Reichelt said. "[The type of new investors green bonds attract] depends on the issuer. In our case, certain groups of pension funds, asset managers, and insurance companies were new investors for us."

World Bank has now issued $6.3 billion in green bonds, and prompted a variety of issuers to sell green bonds too.

Massachusetts' green bond issuance was the first of its kind in the U.S. The state sold $100 million green bonds in part of $670 million general obligation bond sale that ran on May 31 and June 4 in 2013. Proceeds went toward financing projects to support open spaces as well as environmental clean -up efforts at various sites, including the Federal Superfund Site restorations and other brownfield remediation.

Like World Bank's issuances, the green bonds were bought by investors who had not previously purchased Massachusetts GOs and showed that green bonds allowed U.S. issuers to diversify their bond buyers.

"The $100 million in Green Bonds garnered more than $130 million in orders, an oversubscription of 30%," Scott Grossman, treasurer and receiver general of the Commonwealth, wrote in and August 2013 quarterly investor impact report. "The state benefited from 154 different retail orders and 10 unique institutional orders, as well as 7 new institutional land professional retail investors."

Banks did identify some problems with green bond issues, though. Some issuers were unsure if bonds they issued that benefited the environment qualified as "green," and buyers wanted more disclosure on where the money they used to purchase green bonds was going.

"There is lots of discussion going on about what qualifies as green, it's a tough question to tackle," Suzanne Buchta, global co-head of green debt capital markets at Bank of America Merrill Lynch, said in an interview. "We reached out to green investors globally, in Europe and the U.S. where green investors had been to see what criteria they were looking at."

JPMorgan, Bank of America, Citigroup and Credit Agricole released the Green Bond Principles this January which outline the process for issuers to designate specific green projects, disclose, manage and report on an ongoing basis the use of proceeds of a green bond, Feheley said.

The Green Bond Principles deal with the need to provide details on the use of proceeds, the process for project evaluation and selection, and the management and reporting of proceeds.

"We identified four components, and made those the pillars of the Green Bond Principles," Buchta said. "They are not a strict set of rules that have to be followed; as an underwriter we can't dictate to issuers what to do on their issuance, but we can guide and the Principles are guidelines for issuers and underwriters."

A total of 25 banks have now "signed on" to the Green Bond principles, Reichelt wrote in an emailed statement.

The NYS EFC bonds were the first green bonds issued after the Principles were released. Tracy Hitchen Boyd, deputy director of finance for the New York State EFC, said in an interview demand for the sale was boosted by crossover investors.

"[There was a] strong response to sale in general," she said. "The response of green buyers was helpful to certain maturities where we did not have an oversupply in interested investors; it was a win-win. The deal brought in new investors and helped bonds on certain points along curve where demand needed to be upped."

Investors showed particular interest across the first 15 years of maturities, Boyd wrote in an emailed statement.

"Some of the fund managers do have specific green funds established, that they are buying for on behalf of those green funds," Boyd said.

She said that a fund manager who thought the bonds' triple-A rating was a little high chose to buy the bonds because they were green.

Issuers do have to release additional reporting to comply with the Principles, which recommend issuers report annually at least annually on the specific investments made from the green bond proceeds, in addition to the quantitative and/or qualitative performance metrics, where feasible, to measure the impact of the investments, said Feheley.

Boyd said she does not expect the compliance to be high maintenance going forward.

There are currently no municipal green bond issuances scheduled in the U.S. Massachusetts has announced it plans to issue green bonds this summer but has not set an official date.

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