Tuesday, March 22, 2016

California to Issue $500 Million Green Bond for Clean Water Projects

California continues to show leadership in the growing green bond marketplace.

The State of California will soon issue a $500 million green bond to finance at least 34 clean water projects in localities throughout the state.

On March 22, the California Infrastructure and Economic Development Bank (IBank) Board approved the issuance for the State Water Board for their Clean Water State Revolving Fund Program (CWSRF).

This comes on the heels of other green bond action in the state.  The State Treasurer issued a $300 million green bond in 2014. Several localities have issued green bonds in recent months. Apple Computer last month issued a $1.5 billion green bond.  And, State Treasurer John Chiang has taking an in-depth look at additional steps the state can take to promote green bonds (see CalGreenFinance post here).

According to staff of the Water Board, they have about 200 applications (totalling about $5 billion) for wastewater and other clean water projects.  More applications are expected in the future.  The new bond will provide funds for about 34 of the projects.  There has been increased interest by local governments in the program in recent years following some adjustments to allow longer payback terms (now up to 30 years) and lower interest rates.

The IBank Board was told that, based on active planning processes, California is facing a backlog of about $29 billion in needed wastewater infrastructure projects and $36 billion in drinking water projects.  The Water Board plans to address this backlog, in part, by continuing to leverage available funds.  In addition to the approved $500 million issuance, they expect to return to the IBank within a year or two for another $400 million.  They expect to return shortly thereafter for another $300 million bond.

IBank Board Member Peter Luchetti pointed out that other states are more aggressively leveraging similar funds to meet infrastructure need..  He said that New York, as an example, is maximizing their available funds.  When asked about the maximum capacity for California, the Water Board representatives said the state could have as much as $12 billion in bonds outstanding backed by CWSRFP.

The bond proceeds will be restricted to uses allowed by the United States Environmental Protection Agency (details here).  Given the clear and restrictive language, along with existing reporting and oversight provisions, the Water Board does not intend to pursue a third party certification of the green bond.

The bond underwriter representative (Morgan Stanley) was asked generally about the state of the green bond market.  The IBank Board was told that this tax-exempt bond should generate much interest given the high credit rating (AAA by Fitch and S&P; Aaa by Moody's).  The green bond designation may generate some additional interest by a small segment of investors.  The green bond market will grow over time as bigger institutions initiate more green bond funds and green managed portfolios.  There is already strong demand for taxable green bond issuances, especially in Europe.  The market for tax-exempts is smaller, but growing.

For more information, see:

IBank Staff Report
Draft Preliminary Official Statement


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