New Zealand issuers flock to ESG debt funding
Corporate and government-sector issuers from New Zealand took massive steps forward in sustainable debt funding in the last quarter of 2021 as a flood of transactions came to market. Issuers tapped the domestic, Australian and euro bond markets for use-of-proceeds funding while the steady flow of sustainability-linked loan facility completions also continued.
Laurence Davison Head of Content KANGANEWS
Kathryn Lee Staff Writer KANGANEWS
The period from 15 October to the end of November was the busiest yet for sustainable debt financing in New Zealand. Three new domestic use-of-proceeds (UOP) green, social and sustainability (GSS) deals priced and at least the same number of sustainability-linked loan (SLL) facilities were announced (see table 1). In November, New Zealand Debt Management announced plans to enter the sovereign green market – albeit with issuance not likely to begin until late in 2022 (see box).
Perhaps the most notable development in the bond market, however, is two New Zealand issuers taking their programmes to offshore markets. Auckland Council is the second New Zealand borrower to print a euro green bond, while Mercury NZ is the first to tap the Kangaroo green bond market. Both issuers say diversity of funding – assisted by the green format – is a key goal.
John Bishop, group treasurer at Auckland Council, says the borrower’s commitment to returning to the euro market has helped reduce its new-issue concession over time. “We compare ourselves to the Canadian provinces and we have typically always priced wider than them because they issue frequently in the euro market,” he explains. “Now our margin is almost flat as we have become a semi-regular issuer.”
Auckland Council’s euro deal landed on a margin of 18 basis points over mid-swap after being marketed in the 25 basis points area and launching at 20 basis points. Orderbook volume for the €500 million (US$564.9 million) deal surpassed €3.5 billion, and Bishop says 130 investors participated in the transaction of which 91 received allocations. He adds 53 of those are new investors to Auckland Council.
Geoff Smits, senior treasury dealer at Mercury in Auckland, says the company’s Kangaroo debut is an important addition to its funding strategy, even if it comes with a pricing premium. “While tighter pricing may have been available with local issuance, we saw the Australian market as a good option to increase diversity in our funding sources. We intend to be a repeat issuer,” Smits notes.
Mercury’s A$200 million (US$141.5 million) transaction provided Australian accounts a rare opportunity to invest in renewable-energy generation assets, Mat Carter, Auckland-based director and head of capital markets and syndicate at Westpac, tells KangaNews. Westpac was the deal’s arranger and was also a joint lead manager alongside MUFG.
Mercury has an expanding debt position. It recently acquired the New Zealand assets of Tilt Renewables and will soon take on TrustPower’s New Zealand retail business, subject to final clearance.
Mercury will use bond proceeds to finance or refinance new and existing projects and expenditures relating to renewable-energy assets, as outlined in its green-financing framework. The company has around NZ$2.8 billion (US$1.9 billion) of eligible wind and geothermal assets and NZ$550 million in green bonds previously matched to eligible projects.
TABLE 1. ESG-ALIGNED DEBT FACILITIES COMPLETED BY NEW ZEALAND ISSUERS, 15 OCTOBER – 30 NOVEMBER 2021
|Date priced/completed||Issuer||Type of financing||Volume||Green/sustainability coordinator(s)||Lead manager(s)/lender(s)|
|15 Oct 21||Auckland Council||Green bond||NZ$300m||N/A||ANZ, BNZ, Westpac|
|26 Oct 21||Pāmu||Sustainability-linked loan||NZ$85m||Westpac||Westpac|
|28 Oct 21||Christchurch City Holdings||UOP sustainability bond||NZ$150m||Westpac||ANZ, Westpac|
|3 Nov 21||Genesis Energy||Sustainability-linked loan||NZ$100m||Westpac||Westpac|
|8 Nov 21||Auckland Council||Green bond||€500m||N/A||Citi, HSBC, UBS, Westpac|
|8 Nov 21||Warehouse Group||Sustainability-linked loan||NZ$70m||Westpac||Westpac|
|10 Nov 21||Mercury NZ||Green bond||A$200m||N/A||MUFG, Westpac|
|12 Nov 21||Contact Energy||Subordinated green bond||NZ$225m||BNZ||BNZ, Craigs, ForBarr|
|30 Nov 21||Spark Finance||Sustsainability-linked loan||NZ$425m||Westpac||CBA, MUFG, Westpac|
Source: KangaNews 1 December 2021
Local-government issuers headlined the domestic UOP flow in October-November. Auckland Council was again the first mover, pricing NZ$300 million of retail-format green bonds on 15 October. Christchurch City Holdings’ NZ$150 million debut deal incorporated green and social assets to support an offering of UOP sustainability bonds.
Specifically, the bond refinances existing debt used for the construction of a fibre-optic network – Enable – in Christchurch. The transaction extends traditional thinking about fibre as an asset class, according to Kate Archer, Auckland-based associate director, sustainable finance at Westpac.
This means a direct connection to ongoing social outcomes, beyond the construction of an energy-efficient network. Enable is committed to eliminating digital inequity in the Christchurch region and is partnering with Otautahi Community Housing Trust to provide free wholesale internet services for people in social housing, subject to ministerial approval, Archer explains.
The transaction incorporated pre-issuance assurance, which included confirming the alignment of the fibre network with the Green Bond Principles category of energy efficiency as well as four categories of the Social Bond Principles: socioeconomic advancement and empowerment, affordable basic infrastructure, access to essential services and employment generation. Christchurch City is the second borrower to issue a sustainability bond in New Zealand, following Kainga Ora – Homes and Communities.
The issuer may consider more sustainability issuance in the future though Steve Ballard, treasurer at Christchurch City, adds: “It will depend on the value of assets we can include under our framework and whether there is a clear line of sight between the amount being borrowed and the asset we are notionally allocating it against. Realistically, our future issuance will be a mix of sustainable and vanilla.”
A key feature of the transaction was investor interest. The deal team revised price guidance multiple times during the bookbuild process, landing on 35 basis points over mid-swap having launched at 37-42 basis points. At the final revision of the indicative price guidance range, to 35-37 basis points area, the orderbook was more than NZ$330 million.
Ballard says the issuer is confident its use of the sustainability-bond format promoted demand for the deal. “Our impression is that we likely would not have seen the same volume of bids for a vanilla bond,” he says. “It is possible that the clearing margin would have been higher as well.”
Carter says the outcome was the result of a combination of factors. In particular, he says five-year tenor was the investor sweet spot at the time of pricing, the transaction offered accounts unique access to a diversified portfolio of South Island credit while the use of UOP sustainability format created a strong tailwind for overall demand.
While the issuer and arranger have not disclosed distribution statistics, Carter says the transaction was attractive to a wide range of investor types and achieved a granular orderbook. The borrower notes the deal had a strong domestic bid with “pleasing” interest from offshore.
Contact Energy, meanwhile, elected to use its green-bond programme for subordinated issuance – the first time a New Zealand issuer has printed in this format. It priced a NZ$225 million deal on 12 November. The transaction received predominately retail demand. This was not surprising given the deal’s subordinated status, Will Thomson, Wellington-based corporate treasurer at Contact, comments – but there was more institutional interest than expected.
“Capital bonds have traditionally attracted the retail side of the New Zealand market, however institutional demand was still very positive,” Thomson notes. At its peak, the book reached around NZ$630 million.
Thomson says subordinated bonds will be a key feature of Contact’s future capital structure. “The hybrid structure changes how S&P [Global Ratings] views the instrument compared with our senior bonds – assigning it intermediate equity content,” he explains. “This provides an equity credit for rating purposes, helping optimise our capital structure.”
Bond proceeds will be split into NZ$150 million for refinancing Contact’s maturing green retail bond and NZ$75 million toward the construction of the Tauhara geothermal power station.
TABLE 2. GENESIS SLL KPIs AND TARGETS
|Reduce emissions in line with a 1.5 degree trajectory (science-based target)||Genesis has committed to annual greenhouse-gas emissions reduction in line with the target, to total 36 per cent of scopeone and scope-two emissions, and 21 per cent of scope-three emissions, from use of sold products by 2025. Target equals 1.2 million tonnes of carbon emissions by 2025.|
|Development of renewable-energy generation capacity||Genesis has committed to annual milestones for public target of 1,350GWh of installed renewable-energy generation capacity by end 2024 and 2,650GWh by end 2030.|
|Creating pathways for the future of work||Through its “ngā ara creating pathways” initiative, Genesis has committed to delivering a range of education, training and employment opportunities for young people in its local generation-site communities, preparing them for the future of work.|
Source: Genesis Energy 3 November 2021
SLL PRODUCTION LINE
Meanwhile, New Zealand is producing an increasing flow of sustainability-linked loan (SLL) deals – and this sector is also continuing to innovate. Pamu highlights the increasingly granular nature of SLL KPIs, while Genesis’s SLL debut makes the issuer the first in New Zealand to have all of UOP bonds, SLL debt and a sustainable-finance framework that aligns with the Climate Transition Finance Handbook in the market.
The Genesis SLL terms include three KPIs, relating to emissions reduction, renewable-energy generation and future work pathways (see table 2). Importantly, the three are not equally weighted – and the way the facility is structured speaks to the challenges facing Genesis and its material risks.
Dan Dillane, group treasurer at Genesis in Auckland, explains the loan structure aligns with the company’s emissions-reduction trajectory. This was already a central focus of business strategy. Genesis is the only one of New Zealand’s electricity gentailers to have thermal, and oil and gas assets in its stock – these account for roughly NZ$700-800 million, compared with around NZ$2.8 billion of hydro generation facilities.
“The loan structure places more emphasis on the renewables target in the early years before having a greater focus on emissions-reduction in the out years. The point is to recognise that an action – our investment in renewables – leads to the outcome of lower emissions,” Dillane explains.
The social KPI has a lower overall weight in the SLL’s incentive structure. Dillane tells KangaNews the borrower felt it was important to incorporate a social aspect in the facility but its weighting reflects the reality that environmental risk is the most material for Genesis.
The SLL is just one component of Genesis’s plans in the sustainable-debt space. All the company’s bank debt is structured on a bilateral basis across a six-strong banking group and Dillane tells KangaNews it expects “a lot of interest from other lenders in converting their facilities to SLL format”. The first SLL effectively lays down a marker for how Genesis aims to structure its loan book going forward and it includes a lender agreement that can be shared with other banks as the basis for updating loan terms.
On the same day as it signed the loan, Genesis also published its sustainable-finance framework and converted one of its existing bonds – the NZ$100 million March 2022 maturity – to green-bond format. The issuer is not committing to refinancing this line on a like-for-like basis but it now has the capacity to do so should market conditions allow.
“We could probably ‘green’ all our debt financing but the market nowadays is increasingly asking how this changes things, given the nature of our asset base, unless it is linked to a transition strategy,” Dillane comments. “Wholesale investors in particular are typically more interested in sustainability-linked structures.”
In fact, Dillane characterises the decision to introduce SLL borrowing as an alignment with market expectations that will likely extend into the bond space. “I estimate 80 per cent of my conversations with wholesale debt investors are on sustainability – sustainable debt is becoming the norm over time and we do not want to be late to the party,” he explains. “It might not be materially cheaper but there is already more liquidity for sustainability-aligned product and it will eventually become a market-access issue.”
New Zealand to enter sovereign green-bond market
The New Zealand government has announced plans to commence issuing sovereign green bonds, with the first transaction slated for late 2022. New Zealand Debt Management says green bonds will become an “important and enduring part of the New Zealand government bond portfolio” alongside nominal and inflation-linked issuance.
New Zealand Debt Management (NZDM) is commencing work on a green-bond programme it expects to publish in mid-2022. It says: “Design of the green-bond programme will be informed by international best practice and NZDM will engage with market participants to seek their insight on details of the programme. NZDM intends to appoint two of its approved registered tender counterparties as structuring advisers to the programme and a request for proposal will be issued soon.”
At this stage, neither government nor NZDM has made any commitments on programme size or strategy, for instance whether New Zealand plans to follow Germany’s lead by issuing green and vanilla bonds in tandem to make clear any pricing differential.
New Zealand’s minister of finance, Grant Robertson, notes the “substantial and growing” investor demand for sovereign green bonds and also suggests the NZDM programme will “enhance the development of New Zealand’s sustainable-finance market”.
Minister for climate change, James Shaw, adds: “Reforming the financial system has been at the centre of our vision for building a low-carbon economy since we came into government. From the start we have known that we simply cannot address the climate crisis if capital is flowing in the opposite direction to where the world is heading. The creation of a green-bond programme will add a new financing tool we can use to deliver the low-carbon projects we need to meet our climate targets.”
NZDM has historically been tight-lipped on plans to issue green bonds, though it has hinted that it would like any issuance it commits to bringing to market to establish a leadership position locally and gloablly.
For instance, speaking at a KangaNews-Westpac roundtable in May, Kim Martin, Wellington-based head of funding strategy and engagement at NZDM, said: “We have been challenged by sophisticated ESG [environmental, social and governance] investors offshore that have told us not just to issue a green bond against existing expenditure decisions but to do something more ambitious and inventive.”
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