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Junk debt investors welcome rare green bond with strong demand
THE US high-yield bond market is looking a little more environmentally friendly after the first green bond issuance in more than two years.
Hannon Armstrong, which finances renewable energy and power efficiency projects, raised US$350 million from its bond sale last week. The green sale is the first from a high-yield company that does business primarily in the US to price since March 2017, and one of five actively trading green junk bonds, according to data compiled by Bloomberg.
Investors piled more than US$1.2 billion of orders into the books, which enabled the company to increase the amount it borrowed by US$50 million and also lock in lower interest rates as the yield was cut to 5.25 per cent from 5.5 per cent. The bond jumped by more than two points from its par pricing amid strong follow-on demand in the secondary market.
"There just aren't enough great high-yield rated green bonds to go around," said Peter Schwab, a portfolio manager at sustainability-focused investment firm Impax Asset Management. "Most of the typical high-yield issuers are anxious to just borrow money at the minimal cost with the most simplicity so they can get on with their deleveraging plans." The extra cost of selling green bonds has been a deterrent for high-yield companies, which already have to pay more to borrow than their investment-grade counterparts. That may be why high-grade corporate bond supply has been significantly higher with at least 12 issuers including Verizon Communications Inc having sold green bonds so far this year.
Hannon Armstrong's chief accounting officer Chuck Melko said the green bond costs, in addition to what the company will pay in interest, are expected to amount to US$50,000 to US$100,000 for the third-party green bond rating and an external auditor. The proceeds will go towards purchasing or refinancing carbon-neutral or carbon-negative assets, according to a company press release.
Chief financial officer Jeffrey Lipson said it's easier for Hannon Armstrong to certify green bonds than many other companies because everything it finances meets green standards.
Green bond certification is optional. An external review of a bond's green credentials, which Hannon Armstrong undertook, is recommended but not required, said International Capital Market Association spokeswoman Margaret Wilkinson.
Matthew Kuchtyak, a green bond analyst at Moody's Investors Service, said the time it takes to meet requirements, and ongoing monitoring after the debt is raised, are also off-putting for high-yield borrowers.
Most high-yield companies also don't have enough "green" projects that it would be worth financing with a green bond, but that could "change over time", said Brian Ellis, a fixed income portfolio manager at Eaton Vance's responsible investing unit Calvert.
Global green bond issuance reached US$47.2 billion in the first three months of the year, a new first-quarter record and 40 per cent higher than the year-ago period, according to a May report by Mr Kuchtyak.
Wells Fargo & Co, Bank of America Corp and JPMorgan Chase & Co managed the sale of the Hannon Armstrong bond, rated BB+ by both Standard & Poor's and Fitch. BLOOMBERG