Toronto has become the second Canadian city to issue a green bond.
And for the citizens of the country’s largest metropolis, the 30-year, $300-million transaction brings a financial benefit: the yield (3.213 per cent based on a 3.20 per cent coupon) required to clear the market was a tad lower than what a traditional debenture would have cost.
The city has determined that savings of about $600,000 (in present value terms) resulted from the green financing, the proceeds of which will be used for “core and supporting infrastructure for sustainable and clean transportation.” Subway and light rail transport projects will get most of the proceeds.
The city’s savings estimate agrees with an analysis done by one of the firms involved in the financing. The analysis was based on the normal spread between a debt offering by the Province of Ontario and the City of Toronto (about 22 basis points) and the smaller spread (21 basis points) on the green bond.
In this way, Toronto is following the example set by the City of Ottawa, which raised $102 million last November at a yield that was a bit below what a comparable 30-year non-green bond issue would have cost. Ottawa is using the proceeds to finance light rail transit capital work — provided those capital works meet the requirements of its Green Bond Framework.
The word is that the underwriters followed a slightly different procedure with this issue compared with a traditional municipal financing. Rather than underwrite the offering, the agents (RBC Capital Markets was the bookrunner) on Tuesday engaged in a book-building exercise by canvassing the market to gauge investor interest and at what price. Early Wednesday the issue was launched.
There was no great surprise that Toronto would issue a green bond. The news had been announced a few months back when the city said so on its website, noting that its green debenture program “will leverage on the city’s low borrowing interest rates to help finance the city’s transit and other capital projects that contribute to environmental sustainability.” Toronto also decided to do it right by receiving a third party opinion from Sustainalytics, a research firm.
And there was no surprise that the issue, when it came, would be for $300 million. That number was indicated last April in an investor presentation at the RBC Green Bond Conference. And $300 million is in the range of what Toronto raises each time it goes to the market. At the RBC Conference, Toronto said it planned to borrow $2.65 billion over the three years, 2018-2020. After this deal, it has $350 million to raise.
There was also no surprise that the financing was done in early summer: the council takes a summer recess (slated for next month), as do many in the ranks of investors and underwriters.
Both groups were out in full force on Wednesday: the word is that the issue was healthily oversubscribed (meaning the issuer could allocate all the $300 million that were on offer.) About 30 buyers received an allocation.
One source said the buyers “were mostly domestic,” and were mostly institutional investors with a green mandate. In the parlance of the Street, more than 90 per cent of the buyers were in the “dark to light” green category.
Toronto’s $300-million issue caps a busy period of issuance that included a $1.5-billion 10-year financing by CPP Investment Board, a $600-million offering by Manulife Financial and a $450-million financing by Ontario Power Generation. About $5.5 billion has been raised this year, almost three times what was raised in 2017. And the word is that at least a couple of issuers are getting ready to launch their inaugural green bond.