Green Bonds in the Golden State: A Practical Path for Issuers Webinar Three: Making Green Pencil Out October 2, 2019 Moderator: Tim Schaefer Deputy Treasurer for Public Finance, Office of State Treasurer Fiona Ma Raul Amezcua Managing Director, Stifel Jennifer Poree Analytical Manager and Head of Municipal Cooperative Utilities, S&P Global Ratings
Housekeeping Technical Issues Contact GoToWebinar at (877) 582-7011 or https://support.logmeininc.com/gotowebinar Handouts Downloadable PDF of slides available in the Handouts section of the menu Questions Submit throughout the presentation using the menu, questions will be answered at the end Live captioning Available at https://www.streamtext.net/player?event=CDIAC Replay and Transcript Available about 2 weeks after the initial webinar Certificates of Attendance Sent to attendees who are logged in for at least 70% of the webinar, about 1-2 weeks after the original airing date Presentation Links Provided for additional research, links accessible in PDF version of the slides 2
Previous Webinar Resources Available on CDIAC’s website: https://www.treasurer.ca.gov/cdiac/webinars/2019/greenbonds/description.asp PowerPoint Slides Replay Series Resources 3
Our Vision We would like attendees to take away an understanding of the Green Bond marketspace. Panelists will not only discuss the market perception of Green Bonds and the characteristics that are most preferred by investors, but also examine questions such as: o Why are municipal Green Bonds not priced at a premium (i.e., lower yields)? o Why is there a lack of supply of municipal Green Bonds? o Why issue municipal Green Bonds? o How do municipal Green Bonds trade in the secondary market? o What would you suggest potential issuers focus on to satisfy the demands of Green Bond investors? o How does a well-developed mitigation, adaptation, resilience strategy affect the way investors and the rating agencies look at an issuer’s Green Bond program? 4
Moderator: Raul Amezcua Jennifer Poree Tim Schaefer Analytical Manager and Managing Director Deputy Treasurer for Public Finance Head of Municipal Cooperative Utilities Stifel – California Public Finance Office of State Treasurer Fiona Ma S&P Global Ratings ramezcua@stifel.com tschaefer@treasurer.ca.gov jenny.poree@spglobal.com 5
Welcome . Tim Schaefer Deputy Treasurer for Public Finance Office of State Treasurer Fiona Ma 6
Part 1: Overview of the Green Bond Marketplace Presenter Raul Amezcua Managing Director Stifel – California Public Finance ramezcua@stifel.com 7
Bond Pricing Overview A bond is a promise to repay borrowed money (principal) at a future certain date (maturity) with semi-annual interest payments through maturity. Example The Municipal Market Data MMD Scale (MMD) scale represents the yield curve of the highest-rated (AAA) municipal bonds as MMD Credit Actual published by Thomson Reuters. Maturity Scale Spread Yield Determined By: 1 1.06% 0.10% 1.16% Credit Spread Rating Level 5 1.09% 0.15% 1.24% + Security Type Market Factors 10 1.29% 0.20% 1.49% 20 1.74% 0.30% 2.04% Actual Yield 30 1.93% 0.35% 2.28% 8
Market Factors Affecting Credit Spread Rating Supply & Demand Economic Data Credit The FED Spread Treasury Yields Current Events (Pricing) Green Bonds? 9
Professional Retail / Separately Managed Accounts (SMAs) 10
Market Size Since 2016, 54 Green Bond transactions have come to market in California totaling over $8.7 Billion in par amount. Transactions have ranged in par amount from $9 Million to $635 Million. Average par amount of $167 Million. Source: Bloomberg as of September 10, 2019. 11
CA Green Bonds 2016 to 2019YTD Annual Reporting Use of Proceeds External Certification No Energy Verification/ Efficiency 38% Transportation Certification 19% 24% 35% Energy 15% Until Voluntary Expended Self- 11% 45% Water/Wastewater Certification Other 33% Yes 65% 9% 6% Par Amount Credit Type General Tax Status $100M-$249M Obligation >$250M 24% 19% Tax-Exempt 24% 76% Taxable 24% $50M-$99M Revenue 22% 81% <$50M 30% Source: Bloomberg as of September 10, 2019. 12
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Part 2: S&P Global Ratings’ Green Evaluation Presenter Jennifer Poree Analytical Manager & Head of Municipal Cooperative Utilities S&P Global Ratings Jenny.Poree@spglobal.com 14
A Multi-faceted Approach S&P views green related factors in the municipal market in a number of ways. Green Credit ESG* Evaluations Ratings Evaluations *Environmental, social and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. 15 Definition and additional information available on Investopedia.
Green Bond Outlook Labels aside, S&P believes much of the muni market finances environmentally-beneficial projects. Data courtesy of: 16
Many Green Bond principles are also captured in ESG, which S&P views as a credit factor. Green bond and ESG factors are embedded in how we assess the creditworthiness of municipal borrowers in all sectors. Challenges remain with respect to data and disclosure. However, we anticipate that over time, disclosure from borrowers will converge and increase transparency on Green and ESG factors. 17
ESG Lookback Study 35% of USPF rating actions in 2017-2018 were associated with at least one ESG driver. Data courtesy of: 18
Green Evaluation Analytical Approach S&P Uses a weighted aggregate of three factors: Transparency Governance Mitigation Adaptation Green Evaluation or 60% 15% 25% 60% 100% Adaptation Use of proceeds reporting Management of proceeds Mitigation Final Green Evaluation Resilience capex such as Buildings, industrial Reporting Impact assessment (E1-E4 or R1-R4) flood defences, asset efficiencies, energy comprehensiveness structure protection etc. infrastructure, transport, and water Cost Benefit Ranking Resilience Benefit Ratio: Net Benefit Ranking Estimate of reduction in eKPIs* damages if event occurs Carbon emissions, water use, waste creation Resilience Level Hierarchy Applied Adaptation Score Environmental Impact Mitigation Score 19 * eKPI – Environmental Key Performance Indicator
S&P’s Full List of Technology Types In Scope Renewable Energy Transport Energy Efficiency Water Heating and cooling Solar PV Rail (electric and diesel) Conservation measures in: Residential Buildings, Electronics Solar thermal High speed rail Commercial Buildings, Hydro small (<30mw) Residential appliances Underground urban rail Industrial Equipment Office equipment Hydro large (>30mw) Overground urban rail Smart metering in residential buildings Onshore wind Commercial food services Hybrid vehicles equipment Reducing water losses in the Offshore wind Electric vehicles water distribution network Industrial efficiencies: Wave & tidal Hydrogen fuel cell vehicles Water desalination to supply Aluminium, Cement, Landfill gas Electric buses potable municipal water Chemicals, Iron & Steel, Pulp & Geothermal Diesel buses Paper Recycling wastewater to supply potable municipal water Biomass Recycling wastewater to supply Buildings Nuclear Fossil Fuels non-potable water for agricultural uses New Build: Commercial, Nuclear (refurb or new) Recycling wastewater to supply New clean coal (sub critical, Residential non-potable water for other super critical, ultra-supercritical industries and advanced ultra- Refurbishment: HVAC, LED supercritical) Lighting, Wall Insulation, Roof Wastewater treatment to with Insulation, Door & Window no energy recovery Coal to gas Insulation Wastewater treatment with Power plant improvements energy recovery 20
Green Evaluations Public Green Evaluations By S&P Global Split by Purpose Split By Country Based on Project Cost (USD millions equivalent) (USD millions equivalent) Green Energy Mexico U.S.A. Water Europe U.K. China Hong Kong Green Buildings Latin America Green Transportation Data courtesy of: 21
S&P Resources www.spratings.com/greenevaluation Untapped Potential: How the Green Economy is Broadening November 5, 2019 The Credit Impact of Water Risk October 30, 2018 Frequently Asked Questions: Green Evaluations and Transaction Alignment with the Green Bond Principles 2018 July 24, 2018 2018 U.S. Municipal Green Bond & Resiliency Outlook: Comparing the Self-Labeled Market with U.S. And Global Peers February 28, 2018 Green Evaluation Analytical Approach April 26, 2017
Part 3: Discussion of Market Status Presenters Moderator: Raul Amezcua Jennifer Poree Tim Schaefer Analytical Manager and Managing Director Deputy Treasurer for Public Finance Head of Municipal Cooperative Utilities Stifel – California Public Finance Office of State Treasurer Fiona Ma S&P Global Ratings ramezcua@stifel.com tschaefer@treasurer.ca.gov jenny.poree@spglobal.com 23
Why are municipal Green Bonds not priced at a premium (i.e., lower yields)? o Green Bonds offer same security (and rating) and repayment risk as non-Green Bonds o Green Bond investors have a duty to secure a fair yield o We need more dedicated Municipal Green Bond Funds! o Some Green Bonds are deemed “Green Washed” (i.e. not truly Green Bonds) 24
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