Ontario issues long-awaited inaugural green bond; CAD 500m ($448.1m), 1.75%, 4yrs, Aa2e. Mixed portfolio. Nearly 5x oversubscribed! Go Canuks!

Canada’s Province of Ontario has just issued the first CAD-denominated green muni bond, in what they have indicated will be an ongoing program.  The semi-annual coupon is 1.75% with 4 year tenor. Moody’s have rated the bond Aa2e; DBRS AAALe. Underwriters were Bank of America Merrill Lynch, CIBC, HSBC and RBC Capital Markets.

The indicative pricing for the bond was set around CAN 1.25% 1Sep18+38.5bps. It ended up closing 0.5bp tighter than initial price guidance, at +38bps versus the benchmark Canada bond.

Investor demand was strong, with CAD 2.4bn of orders. Yes, that's 2.4bn of orders for a 500m bond. Call that "investor demand".

Canadian investors bought 83% of the bonds, followed by 8% in the U.S., 5% in Europe, and 4% in Asia. “Green investors” accounted for roughly 85% of the overall sales, including a number of international investors who don’t typically buy Ontario CAD domestic bonds.

Oslo University’s CICERO provided a second party opinion on the eligibility framework. Nice line from the report: “Ontario has decided to phase out coal fired power plants. This is good.”

Now to the use of proceeds: it’s an interesting shot, and clearly sold well in the current environment. 

Proceeds of the bond will fund:

  • Clean transportation (e.g. funding of public transportation projects). In particular the Eglinton Crosstown light railway with vehicles that are “electric powered and near-zero emissions”. Total budget for the line is CAD 5.3 billion, so they could easily allocated the bond to just this and all would be cool.
  • Green buildings with at least LEED gold though a LEED silver - or buildings with no rating but with strong energy performance can also be included.
  • Clean energy and technology (e.g. smart grid infrastructure, energy storage)
  • Forestry, agriculture and land management (e.g. sustainable forest management)
  • Climate adaptation and resilience (e.g. flood protection, storm water management)

We were taken by surprise at this: early indications were that the bond proceeds would simply be allocated to rail (i.e. low-carbon transport). While it is clearly climate change focused, the final bond takes quite a broad pool approach. It looks like they’re working to develop a much larger pool than originally intended to give them scope for a lot of repeat issuance.  Good news.

Ontario don’t state in their public documents the proportion of funds they are allocating to different projects. Pity. As noted above, the light rail budget is so big we’d be more than happy with those green credentials – the transport sector accounts for 23% of global energy emissions, and a shift to low-carbon public transport is essential if we’re to achieve emission reduction targets.

Some of the other areas for allocation of use of proceeds, however, are not quite as clear. The independent review from CICERO suggests that the bond has a mixture of asset and programmatic focus that makes it out of kilter with the bulk of the market.

For example, under one heading for use of proceeds, “adaptation projects”, CICERO says:

“Ontario is recognizing that it has to prepare for ongoing and coming climate changes. To this end it has developed an adaptation strategy and action plan for the period 2011-2014 called Climate Ready. Five main goals and 37 concrete actions are outlined in this plan, which is a very useful and forward looking document. Ontario's adaptation projects seem to be both well-structured and practical.”

That’s nice, but in the absence of specific assets being mentioned we seem to be veering away from the concrete asset-focus of green bonds to a value judgment on the policy framework of the issuing entity. This is back to ESG filters on the entity rather than an assessment of the asset. We’d like to know whether bond proceeds are going to specific investments, and how reporting will work.

The detail with forestry is half one way and half the other:

“Forests and trees bind carbon (for a time), provide shade and cooling and generally make for a better environment in urban areas. An initiative to plant an additional 50 million trees in southern Ontario is therefore welcomed.”

The 50 million trees is perhaps simple to report on – although it’s unclear whether bond proceeds are actually going to this. But the following bits don't have much detail:

“Protection and sustainable use of the vast boreal forests in northern Ontario is also important. Regarding agriculture, proposed initiatives to buy local (short travelled) food, initiate a carbon trading system and manage and utilize methane from agricultural activities are good.”

We'd just like to know if money is going to get directed to tangible projects or if this is just a broad policy statement.

In terms of green buildings, see the blog we’ve just put out for the new Förvaltaren green property blog. The challenge in Toronto is that baseline emissions data still seems hard to come by; Ontario have covered themselves by going for Gold LEED and saying Silver buildings will only be included if they perform well under the Energy and Atmosphere LEED category – good, although specifying what they mean by “well” would be useful.

In general we love Ontario’s efforts at tackling climate change (phasing out coal for example), and it’s great to see this bond out. But the Province has more than enough concrete low-carbon transport, green building, and other projects to form a reportable pool; it’s unclear why the drift to much more vague descriptions was seen as necessary. Perhaps a clue is that Ontario has chosen to list all its environmental policies as part of laying claim to its bona fides as a green bond issuer. It’s not directly relevant to the assets the proceeds are allocated to, but I guess it enhances the overall trust factor – and maybe helps with the politics.

Finally, Ontario has committed to annual audits of the allocation of proceeds, having an independent confirmation of where proceeds are directed is a great comfort for investors. Excellent! We’ll look forward to the year one report.