Next week, the Ontario government will receive $1 billion, the gross proceeds from its latest green bond offering. It’s the fourth offering it will have completed over the past three years, the largest it has brought to the market and the biggest by any Canadian issuer.
Receiving those proceeds will cap a process that started last Wednesday when the issuer indicated it wanted to raise a minimum of $500 million via an offering of green bonds for a seven-year term. At the time, the expectation was that it would be priced at 54.5 basis points over comparable Canada bonds.
The next day, after $1.8 billion of investor orders were received, Ontario upsized the offering to $1 billion and priced it at 53.3 basis points over the comparable Canada bond. Investors bought a security — that like the previous three will be listed on the Luxembourg Stock Exchange — with a 2.65 per cent coupon.
Ontario’s latest green bond transaction — the other three raised $500 million (October 2014), $750 million (January 2016) and $800 million (January 2017) — attracted eight new investors, the most since its inaugural offering of late 2014.
It was also the most over-subscribed (1.8 times) since the initial offering when, according to a report by the Ontario Financing Authority, demand was four times the $500 million was available.
The latest financing is noteworthy because it continues the trend of a large average investment commitment: On this deal, 71 investors participated in $1 billion of securities, which translates into an average purchase of $14.08 million.
That average compares with about $16 million last January when “over 50 investors” divided up $800 million; and with an average of $14.4 million in January 2016 when 52 investors received a share of the $750 million on offer. To no surprise, the lowest average allocation occurred with the initial deal when “over 80 accounts” were fighting over $500 million of spoils.
That 2014 transaction, the first by a Canadian province — only Quebec has issued a green bond since then — was notable because of the severe spread tightening that occurred during the marketing period. At launch the plan was to sell the four-year security at a spread of 50 basis points. Strong demand narrowed that spread to 38.5 basis points. Investors received a coupon of 1.75 per cent.
The current issue is significant at another level. It continues the practice of receiving a welcome reception in Canada — on this deal, 75 per cent of the investor demand came from local investors. When U.S. investor demand is added in, 90 per cent comes from North America – a level consistent with previous deals: 91 per cent (October 2014); 87 per cent (January 2016) and 91 per cent (January 2017).
Among buyers, the green bonds continue to attract strong support from asset managers, insurance companies and pension funds. Those three buyers were responsible for 85 per cent of the demand. (The exact percentage on Ontario’s three previous deals is not available because different groups of buyers were used.) And the OFA report noted the large demand from investors with green mandates and/or UN PRI (UN principles for responsible investing) signatories as those groups “represented over 85 per cent of overall sales.”
What is known is that retail investors play a small role. On the three previous financings they contributed a mere one per cent of the investor demand. No information is available for the current issue.
As with its previous green bond issues, Ontario has earmarked a number of eligible projects to receive the proceeds. Those projects are divided into clean transportation, energy efficiency and conservation. Ontario has strict rules that ensure the proceeds are used in the manner they were intended.
The OFA chose not to comment because the SEC-registered deal, has not closed.