British Columbia Bonds to Test Green Label’s Allure

British Columbia sold hospital bonds marketed on the project’s environmental credentials today in the first test of the green-bond label’s usefulness in winning financing for provincial infrastructure projects.

The C$231.5 million ($215.9 million) of 2046 notes were validated for inclusion in so-called environmentally conscious portfolios by lender advisory firm Altus Group Ltd., according to Glen Plummer, a spokesman for the province’s finance ministry.

“If they have something that’s legitimately safeguarding the environment or captures carbon or has some positive impact on climate change and they market it as such, I think people will buy it,” Anthony Edwards, an investment adviser specializing in ethical investments at Portfolio Strategies Securities Inc., in Courtenay, British Columbia, said before the sale. “Many of my clients are willing to give up a little piece of their return to sleep better at night.”

Worldwide issuance of green bonds, which are meant to fund environmentally conscious projects, quadrupled to $8.75 billion in the first quarter from the year before, including two issues in Canada, according to Bloomberg New Energy Finance. Ontario, Canada’s most populous province, is planning to use green bonds to help fund almost C$30 billion in transportation infrastructure projects, according to budget documents.

Hospital Partnership

The plan to build two hospitals on the north part of Vancouver Island is a partnership between the B.C. government and a consortium of private investors called Tandem Health Partners, the entity issuing the notes. Though the province will own the infrastructure it will pay the issuer to build and maintain the hospitals, according to the project’s website.

When the province opened the project to bids it insisted the winner obtain gold certification for the facilities from the U.S. Green Building Council’s Leadership in Energy & Environmental Design program, which measures buildings for their environmental impact. Gold is the second highest rating on the LEED scale.

The bonds being sold to fund the hospitals, which have an A- rating from Standard and Poor’s, were sold to yield 165 basis points more than government benchmarks, according to a person with direct knowledge of the deal who asked not to be named because the terms aren’t public.

Borrowing Costs

“As an issuer, what’s the point in marketing something as a green bond unless you’re going to get some benefit from it,” Bill Girard, who helps manage about C$20 billion as a portfolio manager at 1832 Asset Management LP and isn’t participating in the deal, said by phone yesterday from Toronto. “If you’re trying to label the bonds as green bonds, there’s a purpose. I’m assuming your purpose is you want investors to accept a lower rate.”

The price level suggests cheaper borrowing costs than some recent comparable deals.

Notes sold in March by a private company contracted to build and run a British Columbia prison with a similar rating and maturity are currently trading about 175 basis points more than government benchmarks, according to data compiled by Bloomberg.

Another public-private partnership to extend a highway in Ontario came to market last year selling C$120.4 million of notes with the same rating at a similar maturity and paid 203 basis points more than government benchmarks.

First Sale

“There is certainly a bit more work involved to get a green bond program up and running,” said Travis Shaw, who covers provincial issuers at credit-rating firm DBRS Ltd. in Toronto. “Issuers are going to want to see there’s sufficient demand from investors to warrant that cost.”

On average, investors demanded 149 basis points more than government benchmark yields yesterday to hold debt maturing in more than 10 years from non-financial companies rated A, according to Bank of America Merrill Lynch data.

Camilla Bartosiewicz, a spokeswoman for Altus Group, said in an e-mail message that the Toronto-based company does not comment on client engagements.

Toronto-Dominion Bank said in March that it was the first Canadian commercial lender to sell green bonds, offering a C$500 million debt security tied to funding environmental initiatives.

Ontario has plans to issue a green bond of about C$500 million this year by pledging proceeds from the debt sale to projects that reduce carbon emissions like public transportation, Gadi Mayman, chief executive officer of the Ontario Financing Authority told Bloomberg News in May.

True Provincial

Ontario would be the first province to issue a green bond from its own borrowing program. The public-private structure of B.C.’s deal puts it somewhere in between a government and corporate debt issue, with the proceeds of the debt sale going to a special vehicle created for the project itself.

Canada had seen $5 billion of “climate-themed” issuance as of last year, according to an estimate cited in a May 26 report by Royal Bank of Canada. A healthy domestic market would need between C$10 billion and C$20 billion of notes outstanding, according to the report.

“Should you be paying a premium because they called it a green bond? As a manager I don’t think so,” said 1832’s Girard. “Unless it’s in your investment mandate, I’m not sure why an investor would differentiate. I see an Ontario bond, one is a green bond, one is not a green bond, I’m going to take the one where I can get the best yield.”

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