03 May 2016
At $944 million, Central Puget Sound Regional Transit Authority's municipal green bond remains the largest ever.
Otherwise known as Sound Transit, the US issuer came to market in August with a deal comprising fixed-term and variable notes with tenors ranging between three and 21 years. JP Morgan, Citigroup, Wells Fargo Securities, RBC, Goldman Sachs and Bank of America Merrill Lynch were managers on the deal.
"We chose to label the bond 'green' for three reasons," explains Brian McCartan, chief financial officer at Sound Transit.
"Firstly, to promote our broader sustainability work; secondly, to help the market by issuing a large, best-in-class deal in the muni and transport sectors; and thirdly, to expand our investor base beyond our traditional buyers."
And, he says, it was a success on all fronts. The deal attracted around 20 investors that had never bought notes from Sound Transit before – all of them green buyers in the US.
"Participation from green investors exceeded underwriters' expectations," says Marilyn Ceci, head of green bonds at JP Morgan. "Sound Transit has taken sustainability seriously for years, and that's particularly appealing to green investors."
The combination of mainstream and dedicated investors was new for Sound Transit, and McCartan says that lessons were learned from the transaction.
"In future we want to explore introducing an order period dedicated to green investors, which would take place ahead of the main book building," he explains. "That's because we found green orders getting bumped by much bigger ones from large institutional orders.
"We don't think the little guy should have to compete with the big guy – we want to satisfy them both in order to give our main, large investors the full amount they want while broadening our pool of buyers and providing green investors with labelled notes too. We think segregating the two types of buyer would give everyone a better bite of the apple."
The proceeds are being used to help refinance projects and bonds under Sound Transit's green programme, with a pool of eligible assets amounting to $1.44 billion, including improvements to light electric rail lines, local bus services and the train network. A second-party opinion drawn up by Sustainalytics described the deal as "robust and credible".
It was an unusual step for a municipal issuer to commission a second-party opinion: before Sound Transit, the only municipals to do this were Spokane and DC Water – even though second-party opinions have become commonplace in the broader green bond market.
"The Sound Transit transaction provided real leadership for the transport sector" Marilyn Ceci, JP Morgan
Sound Transit also broke with the pattern set by traditional municipal issuers when it sought annual reviews by Sustainalytics and engaged its financial auditor – KPMG – to complete an annual, post-issuance report, confirming proceeds from the bond were directed in the way stated in the pre-issuance documentation.
"We wanted to establish best practice for the muni space, so we decided to get a second opinion and a post-issuance report," says McCartan. "That did incur some additional costs and staff time, but we didn't feel it was excessively burdensome, and well worth the benefits that came from issuing a good green bond."
The bond also broke new ground by becoming the largest use-of-proceeds green bond ever to be issued exclusively for transport – and the US's first. Earlier in 2015, Transport for London became the first pure-play transport body to tap the market, with a £400 million ($573 million) issue. The Province of Ontario's first transaction in the market was dedicated to public transport, but its successive deals have a wider remit. Toyota came with its second deal last year, but this was asset-backed.
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Sound Transit's success has been mirrored by another US transport body – New York's Metropolitan Transportation Authority, which came to market this year with a $782 million transaction. The Los Angeles County Metropolitan Transportation Authority is also slated to tap the market.
"The Sound Transit transaction provided real leadership for the transport sector," says Ceci, adding that its success "not only strengthened the emerging asset class and proved the viability of green buyers in the tax-exempt space, but also furthered the agency's sustainability agenda".
And, with more than $4 billion of additional debt to issue under its green programme, McCartan expects Sound Transit to continue to be a key player in the market in the years ahead. "We anticipate that most, if not all, of that debt will be issued as green bonds".
|Green Bonds Awards 2016|
|Bond of the Year - corporate||TenneT|
|Bond of the Year - SSA||Nacional Financiera|
|Bond of the Year - municipal||Central Puget Sound Regional Transit Authority|
|Bond of the Year - bank||ING Bank|
|Project bond of the Year||Wind MW (Meerwind)|
|Asset-based bond of the Year||Berlin Hyp|
|Special Award for Innovation (Structure)||Yes Bank / IFC 'back-to-back' transaction|
|Special Award for Innovation (Use of Proceeds)||Schneider Electric|
|Initiative of the Year||The Harmonised Framework for Impact Reporting|
|Personality of the Year||Sean Kidney, Climate Bonds Initiative|
|Biggest Issuer (SSA)||European Investment Bank|
|Biggest Issuer (Corporate)||EDF, Toyota, TerraForm Power|
|Biggest Issuer (Bank)||ING Bank|
|Biggest Issuer (Municipality)||Central Puget Sound Regional Transit Authority|
|Biggest Underwriter||Bank of America Merrill Lynch|