[This article was updated on 17 July to include additional quotes from SFPUC]
The Public Utilities Commission of San Francisco (SFPUC) is preparing to issue what is believed to be the first green bond to incorporate a put option.
The $587.1 million deal is also remarkable because it was actively marketed to international investors, as well as being roadshowed with US investors.
It will be sold in territories including the US, UK, European Union, Switzerland, Indonesia, Japan, Singapore and Taiwan.
The transaction consists of three parts: $221.9 million of Series A notes, $185.1 million of Series B notes and $180 million of Series C notes. The Series A and C notes – worth a combined $402 million – have been certified green by the Climate Bonds Initiative (CBI), according to a preliminary statement by SFPUC.
The Series C notes are subject to a ‘mandatory put’, according to which they must be purchased by SFPUC on 1 October 2023. If it has insufficient funds to buy these notes, their interest rate will increase, to 6% per annum for the first 79 days, and 8% thereafter. The initial coupon has not yet been disclosed.
In 2023, the notes will be re-sold, and are likely to include another put option, Richard Morales, debt manager at SFPUC told Environmental Finance. This could again be five years, or for the remainder of the 30-year notes’ full tenor, he said.
This structure means the Series C notes carry a lower, five-year interest rate relative to its 30-year tenor.
“There is interest rate risk, because in year five we have to remarket our bond, so if interest rates are higher we have to deal with that,” according to Mike Brown, SFPUC's manager of environmental finance programs.
“It’s our first venture into long-term variable-rate financing, which we wanted to introduce given the size of the utility’s Wastewater Enterprise capital programme [to maintain the City's wastewater infrastructure],” said Morales.
“We're trying to have as many financing tools so that we can then bring down the cost of delivering the capital programme, at rates as low as possible for our rate-payers,” Morales said.
It will also be the first SFPUC green bond to be sold outside the US, as it tries to expand its investor base for future debt offerings, Morales said. “We will be coming to market regularly and with quite some size over the next few years to fund the Wastewater Enterprise capital programme.”
SFPUC also has an option to redeem the 30-year, fixed-rate Series A and B notes in 2028.
The transaction is expected to price on 18 July and settle on 9 August.
It will be SFPUC’s sixth green bond, following transactions in each of the past three years, which were worth a combined $916 million, according to Environmental Finance’s Sustainability Bond database.
Proceeds will be used to fund part of SFPUC’s Sewer System Improvement Project (SSIP), including storm water, flood resilience, sewage treatment and wastewater upgrades. The projects are intended to address ageing infrastructure, seismic reliability, combined sewer discharges, rising sea levels and localised flooding.
"High profile US issuers are increasingly attracting attention from global investors and markets and as new green infrastructure bond offerings emerge, particularly in the municipal water, transport and energy infrastructure space we expect this trend to continue,” said Justine Leigh-Bell, director of market development at the CBI.
For Series A and B notes, JP Morgan was lead manager, with Goldman Sachs and Siebert Cisneros Shank were co-lead managers. For Series C notes Citi was lead manager, while Morgan Stanley and Piper Jaffray were co-lead managers. Montague DeRose and Hilltop Securities were advisors, while Stradling and Curls Bartling were legal advisors.
S&P gave the bond an AA rating, while it received Aa3 from Moody’s.