Over $3bn green bonds issued in Oct already! $1.25bn by EDF; $994.5m+ by Agricultural Bank of China; another DC Water GB $100m, repeated issuances, gossip and more!

Wow! What a great start to Q4; issuance is gearing up for Paris! A wide range of issuers are pumping more green bonds into the market - both repeat issuers and new comers from Asia, Plus, we have analysis on what the CarbonCount metric means for investors and as always analysis on the green credentials of some recent issues. 

 

Green Asset Backed Securities (ABS)

Hannon Armstrong’s second green ABS, $118.6m, will save 0.39 tons of GHG annually per $1,000!  ($100.5m, 4.28%, 19 yr, A and $18.1m, 5.00%, 19 yr, BBB)

Hannon Armstrong closed its second green ABS bond (Sustainable Yield Bond) following its inaugural issuance in December 2013. The ABS was a private placement split into two tranches with different credit ratings (from Kroll Bond Credit Rating Agency): $100.5m with a rating of A and 4.28% interest rate, and $18.1m with a rating of BBB and 5.00% interest rate. Both tranches have a 19-year tenor.

Similar to its first green bond, the green ABS is a securitization of ground lease payments for the land used by solar or wind operating assets. Most large scale US wind and solar projects do not own the land on which the assets are installed and operated. Instead it is essential for long-term leases to be agreed to enable stable cash flow of on-shore renewable projects.

For every $1,000 invested in the bond 0.39 tons of carbon will be saved annually according to a CarbonCount review.  CarbonCount was originally pioneered by Hannon Armstrong and further developed by the Alliance to Save Energy as part of the BNEF FiRE initiative.

Now, it may spring to mind, how do leases for land relate to a direct carbon saving of 0.39 tons annually?

CarbonCount uses a 1:1 ratio between project emission savings and total capital costs, therefore every $ spent on capital cost, from buying the hardware to renting the land, is linked to an equal proportion of the carbon emissions saved by the entire project.

Here is a brief overview of how it works: independent audits of each project determine the expected energy output. This is then fed into the US Environment Protection Agency (EPA) energy-to-emissions model to estimate the amount of carbon displaced by producing renewable energy rather than non-renewable, based on the existing energy mix of the State where the project is.

The total annual carbon saved is then split across the total capital cost of the project. The capital cost covers all aspects of the projects (from the wind turbines or solar panels, to the contractual ground leases). The result: for each dollar spent on capital costs of green projects, the amount of carbon saved is the same. So, the score of this bond is based on the emissions saved associated with the total amount of ground lease payment.

Now, this is a really exciting step in transparency of green bonds as it gives investors a tangible impact of their investment per dollar. Other green bonds can leverage CarbonCount, but at the moment the tool seems to be limited to US based renewable energy projects because of the dependence on the US EPA model (we expect this will change in time as CarbonCount grows). Though, we still need to keep our collective eyes on the prize – it’s about a rapid transition to a global low carbon and climate resilient economy. That means we need to think about carbon emissions (absolutely!) but we also need to include assets that are even more complex to define such as sustainable water across broader geographical scope.

 

Green municipal bonds

Second green bond from DC Water for its climate adaptation and clean water projects ($100m, AA/Aa3/AA-, 2.0 - 5.0%, 3-12 yrs)

District of Columbia Water and Sewer Authority's (DC Water) latest green bond was issued in 14 tranches, summing up to $100m as total issuance. The bond will mature between 3 and 12 years with the interest rates of 2.0% - 5.0%. Rated as AA (S&P's), Aa3 (Moody's) and AA- (Fitch). It is underwritten by Bank of America Merrill Lynch.

Similar to its first green bond in 2014, the proceeds are for the DC Clean Rivers Project aiming to improve water quality and flood prevention in the region. This latest green bond will finance the construction of a large tunnel as part of the project.  Once again Vigeo provided a second review of the bond and this time more details were provided on the projects (including the current status of the project and the impacts of 

tunnel projects). Providing the measured impacts of the project, instead of ex-ante estimates, gives a more solid sense how this bond can contribute to climate change mitigation and adaptation.

It is great to see more municipal green bond tie use of proceeds to climate resilience. Good job on integrating reporting and issuance!

 

State of Vermont issued $28.5m of green bonds for diverse climate projects ($28.5m, AA+/AAA/Aaa, 2.0 - 5.0%, 1-15 yrs)

The State of Vermont issued 28 tranches of green bonds to a total of $28.5m with maturity ranging from 1 to 15 years and interest rate from 2.0% to 5.0%. Underwritten by Morgan Stanley, these bonds are rated as AA+ by S&P's, Aaa by Moody's, and AAA by Fitch.

Proceeds can be used for a wide range of projects including energy efficiency in state office buildings certified to a minimum LEED Gold, clean water, wastewater and waste management, climate change mitigation and resilience (these are projects such as flood prevention and natural resource replacement), reforestation, ecosystem restoration and protection.

Interesting to see that similar to the $100m bond by DC Water, this bond also dedicates proceeds to climate resilience, this appears to be a growing trend amongst municipal green bond issuers. Great work Vermont!

 

Green corporate bonds

Biggest US$ corp. green bond by EDF earmarked investors' appetite for more green ($1.25bn, 3.65%, A+/A1/A, 10 yrs)

The French energy giant EDF closed its second green bond last week, marking the largest US$ corporate green bond deal EVER! Supporting renewable energy investment, this $1.25bn bond will mature in 10 years with a annual fixed coupon of 3.65%. It also receives the ratings of A+, A1 and A from S&P, Moody’s, and Fitch. Bank of America Merrill Lynch, CITI, CA CIB, JP Morgan, Mitsubishi and Mizuho are jointly underwriting this bond.

The proceeds will be used solely on new renewable energy projects by EDF Energies Nouvelles. We expect these will be in line with EDF’s previous green bond which, according to EDF’s green bond report, financed 10 wind projects, 2 solar PV projects and a biogas projects across three counties: USA, France and Canada. The projects will be selected based on the environmental and social criteria developed and checked by Vigeo.

EDF also commits to earmark proceeds allocation and to report allocation, project portfolio, and associated environmental benefits regularly. Investors have extra confidence in the green credentials of the bond as Deloitte provides assurance that proceeds of the green bond were allocated to eligible renewable energy projects as part of the annual green bond report.  

As one of the first pioneers in green bond issuance, EDF’s inaugural green bond was a huge success. It is brilliant to see the company taking another great leap in green bond market and achieving future success with this latest green issuance.

 

Agricultural Bank of China (ABC) issues first renminbi-denominated green bond, plugging a total of $994.5m into Chinese green bond market! (CNY600m, 4.15%, 2-yr; $400m, 2.125%, 3-yr; $500m, 2.75%, 5-yr; A1/Ae)

ABC, a Chinese state-owned bank, took the first place in the race to issue a CNY-dominated corporate green bond last week. This inaugural bond from ABC comes in three tranches at CNY600m (interest rate 4.15%, 2-yr), $400m (interest rate 2.125%, 3-yr, and $500m (interest rate 2.75%, 5-yr). Rated as A1 (Moody's) and Ae (Fitch), the bond is underwritten by ABC International, Bank of America Merrill Lynch, Barclays, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, Standard Chartered, and Wells Fargo.

Importantly the green credentials look good. ABC issued a green bond management framework providing details on the process by which proceeds will be managed and allocated to eligible projects, in line with best practice advocated by the Green Bond Principles. The framework also lists certain exclusion criteria for the use of proceeds. Sectors 1) with high risk of environmental pollution; 2) not meeting national environmental standards; 3) without good environmental management practices; or 4) caused environmental destruction in the recent two years; will be excluded for receiving finance from the proceeds of this bond.

The framework also states the types of eligible green projects. Proceeds of the green bond sale can finance renewable energy, energy efficiency, low carbon transportation, sustainable waste management, sustainable land use, and water management projects.

Disclosure of eligibility criteria is a bit varied. We are excited to see more detailed project criteria in low carbon transport, where electric vehicle transportation projects and urban mass transit projects, key green infrastructure developments for cities in China, are specifically listed as eligible green projects. Bravo!  

In other areas we would have loved a bit more detail, such as biomass which is listed under renewables. What is the source of the biomass – are we talking here about chopping down ancient forests or using feedstock from certified sustainably managed forests? Generally this is a minimum we look for, and this is backed up by the Climate Bond Standard for bioenergy which requires feedstock’s to be certified under a credible standard (e.g. FSC standards for woods).

But overall, it’s brilliant work ABC! We look forward to the October 2016 first green bond report to see the big impact the bond will be having on the ground in China’s cities.
 

More repeated green corporate issuance:

Credit Agricole CIB issues a new Uridashi green bond in 114m TRY ($39.3m) to continue support its loan program for pure-play green companies with strong ESG performance. The bond has a maturity of 4 years and annual coupon of 10.85%.

SolarCity Corp issues more retail solar bonds: $25m in five tranches. The solar bonds will mature in 1 to 10 years with interest rates of 2.65% - 5.45%. INCAP is the sole underwriter. Great to see the retail demand is booming for these smaller green bonds!

The Swedish real estate company Vasakronan AB is keeping up its effort in green bonds -- issues 500m SEK ($60m) for green buildings. The bond comes in two tranches, both maturing in 5 years with coupon of 0.747% and 1.5% and solely underwritten by SEB.

 

Development Bank

OPIC issues another Green Guaranty for the 70MW PV project in Chile

OPIC issues a $13.8m Green Guaranty as the final tranche of financing for the 70MW solar PV Salvador project in Chile. The issuance offers an interest rate of 0.14%, maturing in eight years. Bank of America Merrill Lynch is the sole underwriter.

 

Green Bonds Gossip

Sumitomo Mitsui Banking Corp (SMBC) issued a $500m green bond (4.15%, A+ / A / A1, 5 yrs). The proceeds are to finance projects that promote renewable energy, energy efficiency and resource productivity. We are looking further into this bond. Expect more in-depth details next week!

Development Bank of Japan (DBJ) mixed it up with its latest thematic offering by issuing a €300m sustainability bond (roughly 20% proceeds likely to be used for green assets), though not a green bond it’s a great addition to a growing thematic ESG & sustainability bond market - following in the footsteps of Lloyds, Cross-Keys, FMO, MunichHyp and State of North Rhine Westphalia.  More details on this interest development next time!

KfW is about to issue €1.5bn green bonds at 5-year maturity. We're hearing the exceptional welcome to this bond by investors. More beans to spill in our next blog!