Auckland Council beats a path for New Zealand green bonds

Auckland Council revealed its intention to be New Zealand’s first domestic green-bond issuer in March, with market development one of its key objectives. In the wake of the transaction’s pricing, on 21 June, deal sources say the issuer achieved this objective, uncovering significant demand and attracting new investors.

Auckland Council’s NZ$200 million (US$137.9 million) five-year green bond, arranged by ANZ, was the second-ever green bond in the New Zealand market, following International Finance Corporation (IFC)’s NZ$125 million 10-year Kauri green bond in July 2017. The green bond provides funding for low-carbon public transport in Auckland.

IFC had the advantage of already having its global green-bond framework in place when it brought its transaction to the New Zealand dollar market. However, Auckland Council was in unchartered waters for a domestic issuer, with no previous issuance to provide a roadmap.

As a consequence, Andrew John, funding manager at Auckland Council, says establishing the framework, completing the product disclosure statement process, ensuring the compliance of assets and achieving verification and certification, was an intensive, council-wide process.

ANZ acted as green-bond coordinator as well as arranger and lead manager for the transaction, helping the issuer through the process of bringing the transaction to market.

Paul Goodwin, managing director, institutional New Zealand at ANZ in Auckland, says the bank was pleased to partner with Auckland Council in bringing a domestic green bond to the New Zealand market.

“We encourage clients to take up green-finance solutions as they accelerate the adoption of better business practises. Auckland Council continuing to electrify its rail stock is a perfect example of a low-carbon transport initiative,” he says.

“We have a significant amount of assets that meet green-bond criteria. In our next 10-year plan we have roughly NZ$12 billion of transport assets, 40 per cent of which is public transport. We also have assets in water, waste water and forestry that would be eligible for green-bond funding."

Broad benefits

While market development was a stated objective for the transaction, according to Alec Tang, Auckland Council’s corporate sustainability lead, the benefits run deeper than this.

As a local-government agency, Auckland Council is on the forefront of trends for more government transparency and more action on climate change.

“There is a huge push, nationally and locally, for action on climate change in New Zealand. With this transaction we can point to the exact purpose and direction of the funds, which reinforces our commitment to a low-carbon and climate-resilient future,” Tang says.

Eliza Mathews, associate director, sustainable finance at ANZ in Sydney, adds that the semi-government sector is well suited to green-bond issuance, globally and in New Zealand.

“These issuers naturally have capex plans that require funding for infrastructure which is increasingly aimed at emissions reduction, for example electrified rail and green buildings. This dovetails into the universally accepted requirements of financing through green-bond issuance,” she says.

Objective achieved

Market development may be a difficult objective to quantify, particularly based on a single transaction. But with deal sources reporting widespread investor engagement and a pricing advantage, they insist the issuer’s objective has been achieved.

Patrick Mullins, Auckland-based director, debt capital markets at ANZ, reveals that the transaction attracted new investors to Auckland Council bonds, some of them motivated by the same desire as the issuer to see the market develop with a successful inaugural deal.

“New Zealand doesn’t have many specifically green-mandated funds, but there are many funds implementing ESG criteria into their investment decisions. It is an area which is gathering momentum which was reflected in the pricing outcome of this deal,” says Mullins.

Deal statistics supplied by ANZ reveal 50 per cent of the transaction was taken by institutional investors, of which 73 per cent was allocated to institutions with a dark or light green mandate (see chart 1). Bank investors accounted for 49 per cent of the deal, with the remaining 1 per cent going to retail brokers.

Interest was such that Mullins believes Auckland Council attained a degree of price advantage through issuing a green bond. Establishing pricing was challenging initially, given the debut nature of the green issue, with the guidance starting with a wide range of 47-55 basis points over swap. However robust feedback allowed the issuer to narrow guidance to 50-53 basis points on the day before pricing, with the final pricing outcome at the tight end of this range.

Source: ANZ 26 June 2018

“To print at the low end of the range was an endorsement for the transaction and a sign of the demand that is there in New Zealand for this product,” says Mullins.

Market development

The issuer and intermediary reveal that investors were pleased to learn that Auckland Council has a deep pool of green assets which will enable future issuance.

“We have a significant amount of assets that meet green-bond criteria. In our next 10-year plan we have roughly NZ$12 billion of transport assets, 40 per cent of which is public transport. We also have assets in water, waste water and forestry that would be eligible for green-bond funding,” reveals John.

“There is a huge push, nationally and locally, for action on climate change in New Zealand. With this transaction we can point to the exact purpose and direction of the funds, which reinforces our commitment to a low-carbon and climate-resilient future."

This aspect was front of mind during the development of the issuer’s green-bond framework, according to Tang.

“We spent a lot of time with local investors talking about what comes next. The overwhelming message was that investors don’t just want to see one green bond, they are eager for more of this product. This was a very encouraging gauge of domestic-investor appetite,” he says.

Domestic investors were robust supporters of the transaction. Mullins reveals that while there was interest from offshore, and positive feedback from these accounts, the offshore bid was affected by yields in New Zealand compressing significantly to Australia, the US and other markets.

Auckland Council has outstanding deals in euros and Australian dollars, and both these markets are acknowledged to be more developed in the green-bond space than New Zealand. John says Auckland Council has not fully considered the prospect of issuing an offshore green bond but admits that the pricing and interest that could be achieved would likely enhance the overall programme. For now however, Auckland Council is happy to have taken this important first step in the development of the green-bond market.

There is no doubt that this represents a positive step for the New Zealand market, Mullins insists. “There was a question mark over to the extent to which the market would respond to this product. This has been answered emphatically. Auckland Council has set an impressive green benchmark for the domestic market. We would like to see other issuers come with green bonds and there is certainly investor interest there.”

Mathews adds: “ANZ is making it a strategic priority to work with our client base in New Zealand – across multiple sectors – to raise awareness of how to access capital markets through green, social and sustainability bonds, as well as the emerging green-loan market.”