Wkly blog: KfW’s CEO: GB gets better price+investor diversity! KfW 1st kanga A$600($456m) goes bananas/OPIC 3rd 2015 offering $37.4m/More green US munis: Mass, Tacoma, Uni Arizona, Virginia Uni/ EIB’s impact reporting/CICERO’s green shades/WB’s Kyte call

Development bank issuance

Massive demand for KfW’s third green bond offering, and first ever kanga bond, sees it upsize to A$600m ($456m) and its still oversubscribed! 5.25yrs, AAA, 2.4% coupon

After a blazing entry to the green bond market last summer German development bank KfW continued to lead with a Kanga (Australian dollar denominated) bond to the tune of A$600m ($456m). It’s KfW’s first ever Australian dollar bond.

The green bond was massively oversubscribed showing the huge investor demand in Australia for green bonds. In fact the bond was originally planned as a A$300m kanga bond but upsized because of the demand. A great story from down under – now to all those potential issuers in Australia – go local and you’ll get the demand!

To all those sceptic (CEOs) out there – take a lesson from KfW CEO Ulrich Schröder, who spoke at the IDFC conference earlier this week about KfW’s green bond experience. Mr Schröder admitted his scepticism of green bonds but he’s been converted hallelujah! – Why? Because they got new investors and got them at a cheaper amount!

OPIC’s on a roll with a third green guarantee this year alone! And its linked to Chilean solar project; $37.4m, AA, 2.74% coupon

US overseas investment institution OPIC press ahead with their green guaranties programme with another green offering, this time a modest $37.4m, that takes it to three issuances in 2015 alone! The green guarantee has rating of AA, 14 year tenor and 2.74% coupon. BAML was the sole underwriter.

This latest green guarantee will be linked to the Luz del Norte solar project in Chile - following the same format as the inaugural OPIC green guarantee issued in autumn 2014.

Municipal bonds issuance

Tacoma´s green bond funds low emission HGV fleet and supporting infrastructure; $21m, tenor 2yr-10yr,AA/AA-e/A1, 0.8%-2.64% coupon

We mentioned this in February, but our review has been delayed because we were trying to find out more on the use of proceeds. City of Tacoma is a leader in environmental waste management, but when we saw “gas pipeline”, “fuelling” and “parking station” in the green bond prospectus we were concerned.

But we got some details - and it looks much better than we thought. Proceeds finance an upgrade of the City’s waste collection fleet (garbage trucks) from the existing ageing diesel vehicles to diesel hybrids, CNG hybrids, and some more efficient diesels where there were no other options available. Now some may say – this is still using gas so is it green? – unfortunately there are at the moment few other options available for waste collection vehicles, however these CNG hybrids are achieving an emissions improvement relative to conventional models. The key feature is the operational efficiency of the fleets. Operational efficiency is crucial to maximise the climate impact of greener vehicles. Fortunately Tacoma is on it, having already shifted from weekly to bi-weekly collections (reducing fuel usage by 45%) along with on-going fleet performance monitoring. As zero carbon vehicles become available in coming years we would expect cities to switch accordingly.

Next, the fuelling station and car park. Tacoma’s fuelling station will be for the sole use of the new fleet – so no concern on multiple use of the pipeline. The bulk of the cost is the gas compressors, which alter the pressure of the piped gas to enable use for vehicles. The parking structure will also be solely used for the fleet. The CNG trucks need to be refuelled overnight in docking bays in a completely spark-free environment (for health and safety reasons). The construction of a specialist fuel and parking station is therefore required to facilitate the new fleet and will be strictly used for the new vehicles.  Fair enough.

The bond prospectus also leaves room for proceeds to be used on upgrading an ageing metal roof in Tacoma’s recycling centre – we believe investors should consider infrastructure for recycling an eligible investment. However, considering the cost of the compressors and fleet it’s now unlikely that the funding will stretch that far. Overall, great work Tacoma!

Strong demand (2x oversubscribed) for Boston Medical Centre/Massachusetts Development Finance Authority green bond – proceeds will be used to consolidate two hospitals leading to greater energy efficiency; $158m, 29yr-30yr, coupon 4%-5%, BBB/Baa2

Massachusetts is a hot bed for green bond origination, with the latest one a sizeable $158m from the State’s Development Finance Authority. Proceeds from the green bond will fund the consolidation of two hospitals in South Boston.

It’s a revenue green bond backed by the cash flows of Boston Medical Centre and has a credit rating from S&P of BBB and Baa2 from Moody’s. Tenor is a whopping 29 or 30 years with an optional call at 20 years. Coupon is 4%-5%.

The offering was well received gaining a $385m of orders (that’s over 2x oversubscribed) across 41 different investors.

A reduction in energy usage as a result of the new construction is expected to save $4.5m per year in energy costs and 30% reduction in the carbon footprint.

Oh that old chestnut! State Universities jump on the band wagon (set off by MIT last year) to use green bonds as a refinancing tool for newly built LEED certified buildings: this week its newcomers Arizona State ($182.6m, AA/Aa3, 1-21yrs, 2-5%) and Virginia ($97.7m, AAA, 30yr, 4%-5%)

This week we’ve seen two State University refinancing newbies from opposite ends of the country. Arizona State University issued a $182.6m green bond in a series with a range of maturities (from 2015-2036) and coupons (2%-5%).

Proceeds from the green bond will be used to refinance LEED Gold certified buildings for the university. The properties being refinanced are the Law and Society Building Project ($114m), Academic complex (5 campus buildings) and the University Police Department building.

Similarly the Rector and Visitors of the University of Virginia (UVA) issued an inaugural green bond $97.7m to refinance campus buildings. The green bond is split across two tranches; first $67.7m tranche has a 30-year tenor and a second tranche of $30m. Both have a credit rating of AAA from S&P. Coupons range from 4% to 5%.

Proceeds from the bond will be used for constructing, furnishing and equipping buildings that have achieved either a LEED rating of silver or gold. UVA provides examples of refinanced buildings including residential halls for students, a recreation centre, a healthcare center and a building to house a chilling plant to provide cold water to the healthcare center. Although some aspects highlighted are unusual in their green impact claims (e.g. low emission carpets – we’re still looking into the bona fides of that one), the buildings do all meet a level of LEED.

Ideally we would be seeing emissions performance metrics from buildings, on the basis that this is a key issue environmental issue. The correlation between LEED Gold and Platinum buildings and good emissions performance is strong (although not 100%). That means they are a suitable proxy until emissions reporting become commonplace. But the correlation with emissions performance and LEED Basic is not there, and it’s low with Silver. From a climate perspective that means we need to be pushing issuers to keep to the higher rating levels of LEED, as well as other rating systems like BREEAM and Green Star.

Market Developments

Evolutionary changes for Green Bond Principles at the first ever update!

Transparency and process guidelines for the green bond market were proposed in January 2014 by four large underwriting banks. Now the Green Bond principles have 124 members (eligible by having participated directly in a green bond deal; issuers, investors and banks) and observers. The huge growth in members and observers mirrors the growth in the market since last year. The latest version of the Principles are dubbed a “evolution not a revolution”.  We’ll publish a separate analysis later this week.

EIB launches impact reporting showing project level outcomes for green bond portfolio

EIB’s shiny new green bond impact report is a gold star benchmark for all singing all dancing green bond reporting. The report provided project-level disclosure of all its 56 projects funded by green bond proceeds, quantitative absolute green outcomes and intensity per EUR 1m of project cost.

EIB’s report is very useful; one aspect that really excited us was the commitment to independent verification by KPMG on its internal tracking method, the use of proceeds, and GHG data in the context of its annual audit of its 2014 Sustainability Report. Getting an audit on the allocation of proceeds is a crucial part of the reporting cycle and a must for all green bonds. Bravo EIB.

However, it’s important to note that this type of reporting is fine for development banks but would not be feasible for most corporate and muni issuers – it’s costly.  Credible third party auditing to public standards provides a much lower cost option for issuers that will still provide confidence to investors.

CICERO introduce green shades (light, medium and dark green) into their second opinions

Leading second opinion provider CICERO has developed its pre-issuance offering by introducing a green shade rating into its second opinions. The shade will provide investors with insight as to whether the bond will be funding projects in line with 2050 climate targets, or if it only goes part of the way or falls short by not making a long-term impact.

The shade assessment will be based on a “broad qualitative assessment of each project, according to what extent it contributes to building a low-carbon society”. For example a solar project would be dark green as it is consistent with 2050, sustainable buildings would gain a medium green not contributing enough, and low ambition energy efficiency projects in industry are light green due to the short-term CO2 emission gain.

This is a really interesting development as up until now a second opinion has been purely qualitative in outcomes – providing commentary but not a comparable tag. One question is will there be any light green bonds reviewed by CICERO?

Green bond gossip

  • Large US investor Ceres calls on underwriter banks to “help issuers resist designating an environmentally questionable bond issuance as “green"”. Ceres warns of the risk of green-washing if bonds that “don't pass the investor smell test for climate or environmental benefits” continue to be issued. We wholeheartedly agree!
  • Look out for more sustainability bonds from FMO and Ile-de-France. According to IFR Asia both issuers have announced fixed income road shows for the thematic bonds. If you can’t wait for the roadshow you can read more about the Ile-de-France’s 2014 sustainability (green) bond in a newly released report. 
  • Climate Bonds Partner HSBC is running a a seminar in Beijing on 15 April on “Global Sustainable Financing - what does it mean for China? Future, opportunities and client implications”. One of our green bonds collaborators, Professor Wang Yao, will report on the work of the People’s Bank of China green finance committees we’ve also been involved in. Details from rongrong.huo@hsbc.com 
  • World Bank VP Rachel Kyte used a keynote speech at the Green Bond Principles conference to emphasis the need to look beyond Europe to the global south when it comes to the flow of green bonds proceeds. Kyte also highlighted three areas for expansion; the greater use of green ABS (asset backed securities), green bonds in a wider range of currencies and the financing of climate resilient infrastructure. We’re with you on all three! 

Coming up: Rumor has it the world’s first Green Pfandbrief will be issued soon by Berlin Hannover Hypothekenbank – more details in the next weekly blog! Final Q1 summary blog and the Q1 underwriters green bond league table – have the banks been meeting their Green Bond targets? Who is top of the league table? - find out next week!