I've been in Montreal today discussing the prospects for green property bonds and arguing it's as much about re-financing as new projects. We want an owner of a green hotel chain to be able to issue green bonds (and hopefully expand the chain) as much as an owner doing a new retrofit.
Well .... in 2008 and 2009 Massachusetts Institute of Technology (MIT) issued bonds that were used, in part, to fund the building of green property. MIT has just refinanced these bonds by issuing a new bond to pay off the existing debt. In doing so, MIT earmarked the part of the debt ($370m) which was used for green property and repackaged the amount into a green bond. Bingo.
The underlying assets of the green bond are five buildings with strong environmental credentials; four with LEED Gold certification and one with LEED Silver certification.
MIT have nicely shown us all how issuers with green assets can use green bonds as part of refinancing. Since the green properties have already been built there is a question of how much added value – in terms of environmental impact – there is in re-financing existing assets. Response? Re-financing is a core function of bond markets, allowing capital to be recycled to new projects - in fact that's the main value of bonds. The easier it is for people to recycle their equity or bank lending the more they will invest in new projects - a large and liquid green bonds market allows the necessary exit strategy. It's great that MIT was able to take advantage of their green portfolio as part of restructuring debt.
MIT’s green bond totals $370m, with a 24 year tenor and 3.959% interest rate. Moody’s have rated it Aaae. The bond was well received by investors attracting new names to MIT’s book. Strong demand was reflected in the spread which tightened from 70bps to 68bps by pricing. JP Morgan, Barclays and Morgan Stanley were the lead underwriters.
MIT have not opted for third party verification on the environmental credentials of the bond. Generally we look for an independent verification to provide confidence in the green quality of assets. However, by using LEED (a recognised market standard) MIT have still provided investors with confidence in the green property. In particular it is great to see the buildings are at the higher end of the scale with the majority being LEED gold, where correlation with emissions performance is much stronger than lower LEED levels.
For more details about green buildings check out the CBI eligibility criteria for property investments.