Toronto goes green, raises $300 million and saves on interest by doing so

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.

Financial Post

Ontario Power Generation set to be the next green bond issuer

The stage has been set for another issue of green bonds, the second in the past week.

This time around, Ontario Power Generation, an entity that is 100 per cent owned by the Ontario government is set to come to the market, about a week after CPPIB, the investment manager for the country’s public pension plan, raised $1.5 billion in its inaugural offering. That offering is also the largest by a Canadian issuer and the first by a pension fund.

On Monday, OPG posted a green bond investor presentation on SEDAR. The amount the issuer intends to raise wasn’t disclosed but the marketing materials indicated that there is $528 million of capital expenditure indicated as eligible hydro projects. Of that amount, $311 million is what has been spent over the past two years while the balance ($217 million) is projected for 2018. Eligible projects are defined as those that focus on renewable energy generation and which aid energy efficiency and management.

OPG has gone the extra mile to get its upcoming green bond certified: it hired Sustainalytics for a second opinion. The research firm signed off by noting that OPG’s green bond framework “is credible and impactful and aligns with the four core principles of the Green Bond Principles 2017.” It based that assessment on the use of proceeds (the projects selected will have “clear positive environmental impacts,”); on project evaluation and selection; on management of the proceeds; and on reporting (OPG will report annually on how the proceeds are allocated).

OPG, which is Ontario’s largest clean energy generator, owns 72-generation facilities, of which 66 are hydro and two are nuclear. In those marketing materials, it said that following the closing of its coal-fired generation plants, 99 per cent of the power it produces is “free of smog and greenhouse gas emissions.”

If and when it issues green bonds, it will mark its second domestic bond offering: last October it raised $500 million of 10-year money at a coupon of 3.315 per cent. In September 2017, it established a $2 billion medium term note program.

BMO Capital Markets and TD Securities have been chosen as the lead bookrunners. OPG has a split rating: DBRS has assigned an A (low) rating while S&P has assigned a BBB+ rating.

Canada Pension Plan sets record for country’s largest green bond in $1.5-billion debut

Canada Pension Plan Investment Board went green with a bang.

The pension fund, which boasts the highest credit score at the three largest rating firms, priced $1.5 billion (US$1.15 billion) of green bonds Wednesday in what it called the first green bond sold by a pension fund globally. It was also a record size for a single green bond transaction in Canada, according to Bloomberg data.

The 10-year bonds, sold via its unit CPPIB Capital Inc., were sold at a spread of 71 basis points over similar-maturity federal government bonds and offer a 3 percent coupon. They attracted 79 buyers with demand at $2.7 billion, according to a CPPIB statement. The sale was led by CIBC World Markets Inc. and RBC Dominion Securities Inc.

“I like the AAA and the spread is attractive given the credit support,” said Mark Carpani, who helps manage $1.2 billion as head of fixed income at Toronto-based Ridgewood Capital Asset Management and bought the CPPIB green bonds. “CPPIB will put proceeds to good use so I’m fine supporting this.”

CPPIB’s new debt dethrones Ontario’s securities due 2025 as the country’s largest green bond in Canadian dollars. The province’s outstanding securities due 2023 stand at $1.55 billion, yet that total was split between two offerings; an initial $750 million was sold in January 2016, followed by a $800 million add-on of the same notes a year later.

Canada’s green bond issuance has recently been dominated by provincial governments, but an increasing number of other issuers such as insurers and municipalities have been making forays into the market lately too.

In November, Manulife Financial Corp. became the world’s first life insurer to sell green bonds when it priced securities in Singapore dollars. The company followed that transaction in May with the first corporate green bond in Canadian dollars since 2015. The city of Ottawa sold green bonds in November, while Toronto seeks to follow suit in the second half of this year.

CPPIB’s green-bond framework allows for investments in wind and solar energy, sustainable water and wastewater management, as well as green buildings. It plans to invest more than $3 billion in renewable energy as it prepares for an expected global transition to a lower-carbon economy.

CPPIB invests on behalf of the $356.1 billion Canada Pension Plan. It started issuing debt in 2015, selling bonds in both Canadian and U.S. dollars and the euro since.

CPPIB plans inaugural green bond to fund renewables

Canada Pension Plan Investment Board plans to issue green bonds in Canadian dollars for the first time, joining a growing list of borrowers selling the debt to finance environmentally friendly investments.

“The issuance of green bonds is a logical next step to CPPIB’s investment-focused approach to climate change, and we are pleased to be a pioneer among pension funds in this regard,” Poul Winslow, senior managing director and global head of capital markets and factor investing, said in a statement Monday. “The capital raised will help support strong, long-term investments in eligible green assets that position the fund for continued success.”

CPPIB’s statement doesn’t specify the timing or size of the sale, but says the Toronto-based fund engaged the Centre for International Climate Research, which specializes in providing second opinions on the qualification of debt for green bond status.

CPPIB’s green-bond framework allows for investments in wind and solar energy, sustainable water and wastewater management, as well as green buildings. It plans to invest more than $3 billion (US$2.3 billion) in renewable energy as it prepares for an expected global transition to a lower-carbon economy.

Canada’s green bond issuance, totaling $8 billion according to data compiled by Bloomberg, has recently been dominated by provincial governments, yet an increasing number of other issuers such as insurers and municipalities have been making forays into the market in recent months.

Manulife Financial Corp. in November became the world’s first life insurer to sell green bonds when it priced securities in Singapore dollars, and followed that transaction in May with the first corporate green bond in Canadian dollars since 2015. The city of Ottawa sold green bonds in November, while Toronto seeks to follow suit in the second half of this year.

The province of Ontario is the country’s biggest green borrower with $3.05 billion of securities outstanding that were sold in five transactions, including the country’s largest — $1 billion of seven-year bonds — sold in January.

CPPIB invests on behalf of the Canada Pension Plan. The $356.1 billion pension fund, which boasts the highest credit score at the three largest rating firms, started issuing debt in 2015. It has sold debt in the loonie, U.S. dollar and the euro.

Canada slow to embrace green bond market, even though investors are eager to buy

When they’re offered, investors crawl over each other to buy them. But if Canadian issuers don’t see the opportunity in offering green bonds and don’t get creative, the market will not develop to the extent possible.

That’s the gist of a recent report by the Investment Industry Association of Canada. The report by IIAC managing director Todd Evans cries out for a more developed domestic green bond market, in large part because it would provide an alternative financing structure for infrastructure projects.

“Green bond financings issued by public and/or private entities have the potential to reduce financing costs given receptive strong demand (either) driving or encouraging environmentally supportive projects,” wrote Evans, adding green bonds earn that label because of the use of proceeds.

The list of Canadian green bond issuers is small: one federal agency, Export Development Canada; two provinces, Ontario and Quebec; and one city, Ottawa. The City of Toronto is planning one.

Among corporates, TD Bank stands alone with a US$1 billion three-year offering completed last year.

Participation by other corporates could change “given the positive investor reception towards mandates and competitive pricing of green bonds,” said Evans.

One entity, CoPower, has carved a niche among retail investors, who purchase the private placements under the offering memorandum exemption. It will launch its third such issue this month.

Trish Nixon, CoPower’s managing director and head of capital, said the green bonds are backed by portfolios of loans to distributed clean energy projects, including roof-top solar, geothermal heating and cooling projects, as well as energy-efficiency retrofits in buildings. “These smaller projects are under-served by traditional infrastructure investors, but offer compelling return opportunities, alongside significant carbon reductions.”

Among investors, Bruce West, chief financial officer at The Co-operators Group, said his organization invests in green bonds as part of “our commitment to invest 10 per cent of our $9.4 billion in investments that measurably address the world’s most pressing environmental and social challenges.”

“We’re not only doing what’s right, we’re doing what makes sound financial sense for the organization,” given such investments generate “longer-term investment returns consistently performing above benchmarks,” West added.

Why are so few Canadian green bond issuers? One explanation is that it takes effort to set up such a program. For instance, a third-party report is required to certify the capital raised will be used for green projects. As well, the rules require the proceeds not be mixed with the issuer’s other cash balances. Those “costs” can then be assessed against the benefits of attracting a new group of investors, of, at times, issuing at a lower coupon, and of building the market.

Ian Russell, IIAC’s chief executive, said the market “needs a boost. There is lots of potential (because they) provide another option.”

Certainly issuing green has been embraced by willing buyers elsewhere. In 2017, for instance, more than US$155 billion of green was raised by about 240 entities from 37 countries. (In 2016, US$87.2 billion of such bonds were issued; double the level of 2015.)

Of the 240 green issuers in 2017, almost 150 were first-time borrowers. Issuers from three countries, China, France and the U.S. accounted for more than half the total.

And size doesn’t appear to be a problem: Fannie Mae, through its green MBS program, raised a total of US$24.9 billion; France raised US$10.7 billion with US$7.6 billion coming on its debut offering. Three borrowers — China Development Bank, the European Investment Bank, and the New York MTA — raised more than US$4 billion.

Lithuania recently joined the ranks of sovereign issuers with a 20 million euro raise. Poland Belgium, Fiji and Nigeria have previously issued such bonds.

Financial Post



Toronto set to follow city of Ottawa’s lead and issue ‘green’ bonds

The city of Ottawa led the way last November with a breakthrough $102 million issue of 30-year green bonds, the proceeds of which were used to finance light rail transit in the nation’s capital.

Now comes word that the City of Toronto plans to follow suit with an issue of green bonds slated for later this year.

In a posting on its website, the city said 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.”

And what’s more Toronto said that the “expected growth of Green capital projects will allow the city to be a regular issuer of Green Debenture.”

While Toronto’s green debentures will have the same financial and legal characteristics of other city bonds, there is one difference with a green bond. The net proceeds will be used to fund projects supporting city’s environmental sustainability strategies.

The city hired Sustainalytics, a leading Green Bond second-party opinion provider, “to review the Green Debenture Framework and provide a second-party opinion on the city’s environmental credentials and the framework’s alignment with the Green Bond Principles, as administrated by the International Capital Market Association.”

If and when the green issue comes to market, the hope is to pay a slightly lower yield than a traditional debenture issue. It doesn’t always happen, despite the influx of green investors, in part because of the fiduciary duty of money managers is to get the best return for the level of risk taken on.

But Toronto, if for no other reason than the competitive bragging rights, will be fighting hard to achieve such a distinction. The reason: On its green bond, the City of Ottawa’s cost of funding was lower than what a comparable 30-year non-green bond issue would be.

The case for a Canadian sovereign green bond

If timing is everything, then Ottawa-based The Smart Prosperity Institute and London-based Climate Bonds Initiative have done well.

On Thursday, the two are set to publish the State of the Market report, a schedule that puts it in about the middle of the UN Climate Change Conference in Bonn.

The report gave the Government of Canada a shot at a way of accelerating the growth of the green bond market: it advised Ottawa to issue a sovereign bond that would provide “the scale and liquidity” the nascent green bond market needs “to encourage trading and facilitate price discovery.”

If Ottawa follows that advice it would be the fourth country to tap a market that’s seen almost US$100 billion of issuance this year: Poland, which raised €750m last December; France, which raised €7 billion in February; and Fiji, which raised US$50 million last month, have been there.

The report argued that a Canadian sovereign green bond issue would provide “a signal to market participants, raising the profile … and open up the market to new investors with portfolios allocated to sovereign debt.”

But the report — issued at a time when green bond issuance this year by Canadian entities is equal to the total previous issuance — sees a glimmer of hope in the recently formed Canada Infrastructure Bank. In addition, it noted the Minister of Infrastructure has received a mandate letter directive to work on the launch of a Canadian green bond.

“Sovereign green bonds could help harness much needed private capital as public funds alone will be insufficient to achieve Canada’s climate goals,” said the report, which argues for provinces, other than existing issuers Ontario and Quebec, and cities, other than Ottawa, to come to the market. The report also advocates for publicly owned entities “such as water and electric utilities” to issue green bonds.

Ontario, which has been to the green market on three occasions, intends to return. In prepared remarks, Gadi Mayman, chief executive of the Ontario Financing Authority, said Wednesday that Ontario plans to launch its fourth green bond “before the end of fiscal 2017–18.”

The report indicates the supranationals — the World Bank and a slew of development banks — are the big players, having issued more than US$50 billion (or about one-quarter of total issuance) of such bonds over 10 years. Entities from the U.S., China, France, Germany and the Netherlands are the next five largest issuers. Over the same period, Canada has been the 10th-largest green bond borrower.

So far in 2017, $3.8 billion of green bond borrowings have been raised by Canadian entities, with TD Bank’s US$1 billion being the largest. Most end up with institutional investors (on the City of Ottawa’s $102-million deal, for example, 96 per cent was allocated either to investors with green mandates or investors who had signed the UN’s Principles for Responsible Investing.)

But one firm, CoPower Inc., an exempt market dealer, offers green bonds to retail investors. The green bonds it issues — and it’s in the market now with a $20-million offering, of which more than $6 million has been raised — are backed by portfolios of clean energy project loans. So far it has made $14 million of investments.

But the report says there is no reason to rest because issuers, when they bring forward a transaction, stand to receive a warm reception. In short, demand from investors both with and without green mandates is typically very strong. On Ottawa’s borrowing, demand was 2.7 times what was available.

Financial Post

Attractive returns make green bonds a ‘game changer’

By 2020, a mere five years away, there could be one trillion dollars of new green bonds issued – up from US$36 billion raised in 2014.

That’s the call made Friday by the research group at BofA Merrill Lynch who argue that the market’s growth will be helped by developments in areas other than Europe and the U.S.

“With favourable business and political tailwinds, the Green Bonds market has the potential to grow to US$1 trillion by 2020,” noted the 24-page report, when citing information from the Climate Bond Institute.

As of mid-March 2015, borrowers in 19 countries in 23 currencies have issued about 300 issues of green bonds. So far this year about US$4.7 billion has been raised with a US$800-million eight-year offering by Terraform, Power Operating LLC being the largest.

“Our view is that Green Bonds are a game changer in unlocking private capital for environmental needs,” said the report.

In 2014, corporates were responsible for US$12.5 billion of issuance with a US$3.427 deal by GDF Suez being the largest. Companies in the power generation and energy utilities are the largest issuers by sector. In 2014 there were 14 offerings of asset-backed green bonds.

Supranationals, development agencies and sovereigns are the largest borrowers. (There have been at least four green bond issues in Canada: TD Bank and the province of Ontario have all issued such securities.)

But for the $US1 trillion of issuance to emerge, the report notes that there has to be many positive developments including “increased standardization, development of second and third party assurance, political support and overall further maturation and diversification of the Green Bond market.”

The study reports that green bonds have proven to be an attractive investment. Merrill’s green bond index, home to 57 issues, has posted a cumulative, annualized return since inception (December 2010) of 6.37%.

“Year to date, the index has outperformed the Global Government and Broad Market Indices but underperformed the Global Corporate and Quasi-Government Indices,” said the report. And when risk is added in, the study noted that the index’s so-called Sharpe Ratio “continues to lead other flagship global bond indices.”