Green bond sales are set for a record year as investors in clean-power and climate projects seek long-term gains from the securities.
With $6.03 billion of bonds sold since January, the securities are on course to surpass $9 billion this year, beating the record $7.5 billion sold in 2010, according to data compiled by Bloomberg. Issues include $1 billion by MidAmerican Solar, a subsidiary of Warren Buffett-controlled Berkshire Hathaway’s Mid-American Energy Holdings Co., to build and operate the Solar Star projects in California. The European Investment Bank has sold $1.3 billion of green bonds this year.
Investors are snapping up bonds to finance the global expansion of clean energy, promoted by governments from the U.S. to China to tackle climate change. The debt, issued by development banks or by project sponsors themselves, offers investors an alternative to volatile equities while boosting funding prospects for developers as nations from Spain to Romania have reined in support for the industry.
“There is a rising demand on the part of U.S. insurance companies, money managers and pension funds for quality infrastructure and project finance projects,” Nasser Malik, head of global structured debt at Citigroup Inc., which underwrote 50 percent of the MidAmerican Solar bond, said by phone Aug. 19. “The longer duration of the credits is a good match if you’re managing a liability profile.”
Green bonds analyzed in a survey by Bloomberg New Energy Finance include debt issued by development banks or international finance institutions where the issuer’s funds are used to repay interest. The study also looks at project bonds where repayments come from cash generated by the venture.
The MidAmerican Solar bond, issued by Solar Star Funding LLC to finance the $2.75 billion, 579-megawatt project, has a 5.375 percent coupon. The notes mature in 2035. It was priced June 20, a day after U.S. Federal Reserve Chairman Ben S. Bernanke signaled the central bank may start dialing down its unprecedented bond-buying program this year.
“It was literally priced the day after Bernanke’s now famous statement that began the roiling of the credit markets globally,” Malik said. “Investors will appreciate the merits of investing in this space based on relative value, the secured nature of many financings and duration.”
Citigroup, which underwrote the most project bonds this year with $583 million, according to BNEF, expects the market to “grow, deepen and broaden,” according to Malik.
Institutional investors such as insurance and pension funds are the largest buyers of project bonds, according to disclosed holdings surveyed by BNEF. American International Group Inc. is the top holder, with $308 million since 2011.
Clean-energy investment dropped 11 percent to $268.7 billion last year after governments in rich countries reduced subsidies. In April, the International Energy Agency reiterated that $5 trillion of additional investment is required by 2020 to switch to a low-carbon economy.
“We have now entered the age of bonds,” Sean Kidney, chief executive officer at the Climate Bonds Initiative, a non-profit organization promoting low-carbon investment, said by e-mail. “If we are to get real finance to get these industries at scale, we have to engage with capital markets.”
For project bonds, ventures surveyed since 2011 are mostly in the U.S. and Canada.
“The U.S. has definitely been leading the pack globally, but that could change,” Joseph Salvatore, the BNEF analyst in New York who compiled the report, said by e-mail.
“We’ve identified a $142 billion slice of the global clean-energy pipeline that we believe could be securitized into project bonds, and nearly $100 billion of that is from European offshore wind installations,” Salvatore said.
The notes surveyed generally paid higher coupon rates than average rates of recent U.S. and European utility bonds, BNEF data showed.
Skandinaviska Enskilda Banken AB is the largest underwriter of development bank securities with $2.76 billion since 2007. Morgan Stanley underwrote the most of those securities this year with $608 million, according to the London-based researcher.
The EIB is the top seller this year with $1.3 billion, followed by Washington-based IFC. The World Bank Group unit plans to continue to issue $1 billion each year in green bonds, said Evelyn Hartwick, who leads the green bonds program.
“What the green bond is doing is providing a AAA asset to investors without the risk of the project, while also giving investors the opportunity to channel funds into the sectors that they want to develop,” she said by phone. “Investors are more interested in fixed income than in equity investments because there is less risk.”