Housing NZ ticks the boxes in sustainability bond debut
New Zealand’s environmental, social and governance (ESG)-themed bond market took another giant leap on 28 March, with the pricing of Housing New Zealand (Housing NZ)’s debut sustainability bond. The deal nearly doubles the total size of the New Zealand ESG-themed market and drove investor diversity and a positive pricing outcome for the issuer.
The NZ$500 million (US$340.7 million) 7.5-year deal is the fourth bond line established by Housing NZ since its debt capital markets return in June 2018. The transaction, led by ANZ and BNZ, is the issuer’s largest single-tranche deal and by far the largest ESG-themed bond priced in the New Zealand dollar market.
There has been a flurry of ESG-themed bonds in the New Zealand market in the first quarter of 2019, from a range of sectors, after only two previous green-bond deals (see chart 1).
BNZ was the arranger of the issuer’s sustainability-financing framework, which was announced to the market on 8 March and allows Housing NZ to issue green, social and sustainability bonds. The framework is aligned with International Capital Market Association green-bond principles, social-bond principles, sustainability-bond guidelines and Loan Market Association green-lending principles.
Source: KangaNews 1 April 2019
Sam Direen, Wellington-based treasurer at Housing NZ, says the sustainability bond was undertaken due to four key drivers: to strategically align Housing NZ’s bond issuance with its organisational commitment and objectives, to align with central-government commitments and objectives - particularly its focus on wellbeing and international commitments such as the United Nations Paris Agreement and Sustainable Development Goals, to increase organisational accountability and commercial discipline off the back of the transparency provided by the framework and to increase investor diversification.
Direen adds: “The impetus to explore issuance in ESG format was driven by a number of factors, which included the initiative of the Housing NZ board, and senior management, who saw the clear opportunity to link financing with other key strategic pieces being progressed within the business.”
The strategic pieces are Housing NZ’s customer and environment strategies, which have both been finalised in the last 12 months. Direen says the entire organisation was quickly behind the ESG issuance.
“Once we decided this was something we would do, we expedited the process and wanted to establish the programme and be able to issue as efficiently as possible. We began working on this late in 2018, had engaged BNZ to set up the framework in January and were ready to issue by March. The fact that most of our expenditure fits into the social category of ESG helped speed up the process,” says Direen.
Mike Faville, head of debt capital markets at BNZ in Auckland, says engagement with investors on the sustainability-financing framework has been positive and that it helped to bring some offshore investors into the transaction.
“Housing NZ’s close relationship with the central government and the added social aspect of its activities make this a very appealing credit for investors. The sustainability theme helps, acting as a signal to some investors,” Faville tells KangaNews.
The sustainability theme was chosen due to the significant investment Housing NZ is putting into green buildings, Faville continues. From 1 July, all its new houses will have a six-star green rating from the New Zealand Green Building Council, which is expected to provide enough assets to enable future sustainability-bond issuance.
Dean Spicer, Wellington-based head of capital markets New Zealand at ANZ, says the transaction provides another good price point for the New Zealand dollar ESG-themed space, following several green-bond transactions.
Direen expects Housing NZ to be a repeat issuer in sustainability format and is confident there will be assets to support this. He adds though that Housing NZ is also committed to adding liquidity to its existing non-ESG lines, particularly the 2025 and 2028 maturities.
Given the transaction nearly doubled the entire volume of ESG-themed issuance in New Zealand dollars to date, there may be questions around market capacity for as much future issuance as Housing NZ may need. However, Spicer insists Housing NZ’s plans should give the market confidence and encourage more funds to be dedicated to the space.
“Having consistent issuance will help bring maturity to the market,” he says. “To this point, issuers and investors looking at the space haven’t been able to act with certainty due to lack of volume, but the market is now developing at an encouraging pace.”
Direen is confident that the main objectives of the inaugural sustainability bond were met. Offshore participation was markedly higher than Housing NZ’s first transactions – to 21 per cent from 11-14 per cent (see table). Given the volume for this deal is much larger, it represents a significant uptick in offshore participation.
Housing NZ deal distribution by geography
|Pricing date||Maturity date||Volume (NZ$m)||New Zealand (per cent)||Offshore (per cent)||Total no. of investors|
|1 Jun 18||12 Jun 23||250||89||11||17|
|1 Jun 18||12 Jun 25||250||87||13||19|
|12 Oct 18||12 Jun 23 (tap)||50||99||1||7|
|12 Oct 18||18 Oct 28||250||86||14||15|
|28 Mar 19||5 Oct 26||500||79||21||20|
Source: Housing New Zealand 1 April 2019
Furthermore, Direen says four specifically ESG-mandated investors participated in the deal that Housing NZ had not seen in its lines before.
Faville says the offshore participation would perhaps have been even higher had the Reserve Bank of New Zealand not flagged the possibility of interest-rate cuts while the deal was in the market. While this caught some off guard, Faville says the deal was still very well covered.
Meanwhile, Spicer says the domestic and offshore investor set found the sustainability theme appealing, with this aspect contributing to Housing NZ being able to cover its maximum volume at a competitive final price.
On pricing, Faville confirms the deal priced inside Housing NZ’s secondary curve – but this also occurred when Housing NZ came to the market with its second transaction and is as attributable to increasing investor familiarity and participation as it is the sustainability theme.
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KangaNews's latest supplement focusing on sustainability in the Australian fixed-income market.