Green Bonds Were Worth the Effort for the Midpeninsula Regional Open Space District SOLUTIONS By Stefan Jaskulak The Midpeninsula Regional Open Space District s recent bond refunding, its first green bond issue, became a template for how the district will approach future bond issues. The Midpeninsula Regional Open Space District (Midpen) approached its recent bond refunding as a unique opportunity to engage with its constituency and participate for the first time in the emerging green bond market while capturing historically low interest rates to achieve maximum savings. In 2014, more than two-thirds of Midpen voters approved up to $300 million in general obligation bonds. Since then, the Midpen s board of directors have made a priority of engaging the district s constituency, and Midpen s general manager and chief finance officer saw an opportunity in 2016 to combine public engagement with the bond issue via green bonds. The idea was to strategically engage district residents by enabling them to buy district bonds and to directly invest in and support the district s public mandate to acquire green open space preserves throughout the two suburban counties more commonly known as Silicon Valley. THE GREEN BOND MOVEMENT Green bonds are tax-exempt bonds that fund projects with positive environmental and/or climate benefits. The majority of the green bonds issued are green use of proceeds or asset-linked bonds. The proceeds are earmarked for green projects but are backed by the issuer s entire balance sheet. The impressive growth of green bonds nearly $100 billion were issued globally in 2016, more than double the number issued in 2015 has its roots overseas, with most of the transactions to date issued by development banks and European corporations. The growth of the U.S. green bond market has been similarly impressive, with U.S. municipals emerging as one of the fastestgrowing segments of all green bond issuers, with nearly $22 billion of issuance since 2014. The evolution of the green municipal market over the last few years has been marked by dramatic growth in both supply and demand. More than 100 issuers nationwide have pursued green or sustainability bonds (bonds where the proceeds will be exclusively applied to finance or refinance a combination of both green and social projects; see Exhibit 1), and many institutional investors now maintain dedicated socially responsible investing (SRI) portfolios, mandates, or analysts to evaluate and invest in green bonds and other SRI vehicles. As the market develops, the industry is refining and standardizing green criteria, guided by environmental, social, governance (ESG) criteria as established by the Climate Bonds Initiative, an international non-profit organization working to promote green solutions. The market is developing reporting standards required by October 2017 Government Finance Review 39
Exhibit 1: Green, Social, and Sustainability Bonds Green Bonds n Energy Efficiency in Buildings n Mass Transit n Water, Wastewater and Waste Treatment n Renewable Energy n Resilency n Environmental Protection investors and contemplating whether self-designation is appropriate, or if third-party opinions and certifications are required. IS GREEN WORTH PURSUING? Undercutting the enthusiasm for green bonds is the difficulty in claiming that they translate into any meaningful cost savings for municipal issuers. At best, green bond issuers can point to investor diversification benefits, with the potential to expand the buyer base with green and SRI-focused institutional and retail buyers. The lack of a defined yield benefit, combined with the potential additional cost and reporting requirements, discourage many from participating in the green bond market. As a result, issuers that do pursue a green issuance have to look for something more. Sustainability Bonds Social Bonds n Education n Healthcare n Affordable Housing n Water n Food and Agriculture n Information and Communication Technology The market is evolving beyond green, as issuers and investors alike are increasingly interested in promoting the socially responsible elements of bond offerings. It remains to be seen whether bonds with designations such as social or sustainability will become more commonplace. For Midpen, the benefits of a green bond issue were clear. The agency s entire mission and purpose is predicated on the idea of green preservation. For Midpen, the benefits of a green bond issue were clear. The agency s entire mission and purpose is predicated on the idea of green preservation: to acquire and preserve a regional greenbelt of open space land in perpetuity, protect and restore the natural environment, and provide opportunities for ecologically sensitive public enjoyment and education. Even if the district doesn t realize cost savings today, it sees a real benefit in advocating for all things green, and an appeal in being an early participant in something that can grow over time. One day, the market might achieve meaningful benefits in investor diversity and cost savings. Pursuing a green bond also allowed Midpen to continue its community engagement efforts in a way that would appeal to the growing socially responsible investing movement in Silicon Valley, the Bay Area, and nationally. More than one out of six dollars under professional management in the United States is devoted to sustainable, responsible, or impact investing strategies. Since 2014, this reflects a two-year growth rate of 76 percent, which is anticipated to increase. For an agency like Midpen, which has many stakeholders (including taxpayers and users of the district s green open space preserves) who are also SRI investors, a green bond issuance provided a significant opportunity to attract their support as investors as well. THE OPPORTUNITY Two of the bonds in Midpen s debt portfolio were callable with significant savings opportunities, as highlighted in orange in Exhibit 2. The anticipated savings was estimated at approximately 15 percent, which is well in excess of the traditional 3 percent rule. THE TEAM To successfully issue bonds, an organization must first assemble a core internal bond team that is nimble and empowered to make key decisions as issues arise. Midpen s internal bond team consists of the three board- 40 Government Finance Review October 2017
Exhibit 2: Midpen s Debt Portfolio Midpeninsula Regional Open Space District Outstanding Debt General Obligation/Promissory Notes Ratings: AAA/AAA (S&P/Fitch) Lease Revenue Ratings: AA+/AA+ (S&P Fitch) Series Credit Purpose Tax Sale Final Issued Par Total Par Total First Call Percent Status Date Maturity Outstanding Callable Par Date Advance Outstanding Refundable 2007A Promissory Notes Refunding Exempt 12/15/2006 9/1/2027 $52,415,000 $47,300,000 $44,065,000 9/1/2016 0 2011 Lease Revenue New Money Exempt 5/19/2011 9/1/2024 20,290,000 20,290,000 19,090,000 9/1/2021 100 2012 Promissory Notes Refunding Exempt 1/19/2012 9/1/2041 31,264,707 29,949,7707 20,499,107 9/1/2022 73 2015 Promissory Notes Refunding Exempt 1/22/2015 9/1/2034 23,630,000 23,225,000 13,405,000 9/1/2025 46 Subtotal General Fund Debt 127,809,707 120,764,707 97,059,107 2015A General Obligation New Money Exempt 7/29/2015 9/1/2045 40,000,000 40,000,000 35,470,000 9/1/2025 100 2015B General Obligation New Money Taxable 7/29/2015 9/1/2021 5,000,000 5,000,000 0 N/A N/A Subtotal General Obligation Debt 45,000,000 45,000,000 35,470,000 Total $172,809,707 $165,764,707 $132,529,107 n Refunding Candidate appointed positions general manager, general counsel, and controller and the chief financial officer and finance manager. To assemble the external bond team, Midpen decided to issue requests for proposals (RFP) to engage an underwriter, financial analyst, bond counsel, and disclosure counsel simultaneously. The RFP and selection for a financial advisor would usually be issued and completed first, to enable the financial advisor to assist in the selection of the underwriter, bond counsel, and disclosure counsel. However, Midpen decided to handle this internally and select all four specialties simultaneously. This approach also saved time because the RFPs were issued and reviewed concurrently, interviews were conducted within a short timeframe, and the final selection proposed to the board of directors was a complete bond team proposal that required a single decision. All together, Midpen received 28 very strong responses. This was a lot of reading, but reviewing the RFPs across saved the team s sanity. When reading across, you read each section of the RFP response for all respondents and score that section before moving on to the next. Reading RFP responses one at a time, in their entirety, makes scoring and content retention more difficult. THE DEAL It was apparent that the district s 2007A bonds, callable on September October 2017 Government Finance Review 41
Exhibit 3: Midpen s Green Bond Deal Outstanding General Fund Service n 2007A n 2011 n 2012 n 2015 Outstanding General Fund Debt Service n 2007A n 2011 n 2012 n 2015 n 2016 Millions of Dollars 10 9 8 7 6 5 4 3 2 1 0 Millions of Dollars 10 9 8 7 6 5 4 3 2 1 0 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 Fiscal Year Fiscal Year Summary of Final Refunding Results Refunding of 2007A Refunding of 2011 Total Refunded Bonds Call Date Current 9/1/2021 Various Maturity Range 2017-2027 2022-2041 2017-2041 Par Amount $44,065,000 $19,090,000 $63,155,00 Average Coupon 4.99% 5.53% 5.29% Average Life 6.27 Years 18.26 Years 9.89 Years Refunding Bonds Par Amount $37,975,000 $19,435,000 $57,410,000 Premium $7,695,720 $3,867,938 $11,563,658 Total Sources $45,670,720 $23,302,938 $68,973,658 Average Life 6.23 Years 14.72 Years 9.06 Years All-In TIC 1.44% 2.69% 2.08% Cashflow Savings $8,936,566 $6,781,627 $15,718,238 Average Annual Cashflow Savings $812,415 $271,267 $628,730 PV Savings ($) $9,300,950 $3,393,491 $12,694,441 PV Savings (Percent of Refunded Par) 21.11% 17.78% 20.10% 42 Government Finance Review October 2017
1, 2016, could be refunded as a current refunding. An advance refunding of the 2011 bonds was added during the process to capture additional savings for minimal additional work. A plan of action and a timeline were developed in early 2016 to assemble a bond financing team that had experience in issuing green bonds and a strong retail presence to engage the district s constituents. The team also needed to be able to successfully issue green bonds in alignment with Midpen s mission, while providing a strong retail presence to approach the substantial high-networth retail investor base in the Silicon Valley. Midpen also developed a comprehensive marketing plan to show its constituency that it had not forgotten those who voted for the measure that allowed the bond issue, and that they would have an opportunity to own a bit of Midpen through their financial investment in it. Exhibit 4: Refunding Cash Flow Savings Bond Year Ending September 1 n Refunding of 2007A n Refunding of 2011 Millions of Dollars 2.0 1.5 1.0 0.5 0.0 2017 2019 2021 2023 2025 2027 2029 2031 Fiscal Year The transaction achieved cash flow savings of $15.7 million (net present value, or NPV, savings of $12.7 million), or 20.1 percent of refunded par, and a reduction in final maturity by three years. This refunding deal exceeded 2033 A plan of action and a timeline were developed in early 2016 to assemble a team that would be able to successfully issue green bonds in alignment with Midpen s mission, while providing a strong retail presence to approach the substantial high-net-worth retail investor base in the Silicon Valley. 2035 2037 2039 2041 expectations from a debt-restructuring standpoint, and it also supported the charge of constituent engagement, with retail sales making up 65 percent (15 percent individual + 50 percent professional retail). Several investors indicated their mandate to invest in green bonds. Initially, the bond team planned to refund only the 2007A bonds and take level savings a fairly vanilla approach until they realized, early in the development of the preliminary official statement, that it made sense to include an advance refunding of the 2011 bonds as well. With the longer maturity range of the 2011 bonds, structuring the refunding bonds with back-loaded savings increased the NPV of the savings and reduced the final maturity by 3 years. (See Exhibit 4.) ENGAGE CONSTITUENTS To make the district s residents aware of the opportunity to purchase the green bonds, the district and the bond financing team developed an extensive and aggressive retail marketing campaign through online social media advertising and traditional print ads. Midpen strived to convey the message that the district is an excellent steward of the public s funds through a financing program supporting the district s mission of land acquisition and preservation of a regional greenbelt of open space land. This was achieved in the following ways: n Green bonds postcard mailing to approximately 14,000 engaged district residents. October 2017 Government Finance Review 43
Exhibit 5: Advertisement for Bond Issue The first notable change in the proposal is a provision to eliminate advance refunding. n Green and sustainability focused Investing with Impact team from the underwriter to promote socially responsible investing. n Purchase of banners on the local newspapers websites. n District e-newsletter distribution to approximately 8,000 recipients. n New district website page leading to the underwriter s retail marketing page. n Use of social media, including Twitter, Facebook, and LinkedIn. n Web-based investor road show with voiceover by general manager and CFO. n Wealth advisor marketing by underwriter s retail network. n Press releases to Bay Area media channels and interested related organizations. n Tombstone advertisements in local newspapers on the Friday, Saturday, and Sunday preceding the sale (see Exhibit 5). CONCLUSIONS This deal became a test and template for how Midpen will approach future bond issues. The district s approach to this bond deal has created synergies between its well-managed public finance program as a whole and Silicon Valley opinion leaders, along with an interesting melding of open-space preservation and restoration in this technologically transformative region. y STEFAN JASKULAK is chief financial officer and director of administrative services for the Midpeninsula Regional Open Space District. He can be reached at sjaskulak@ openspace.org. 44 Government Finance Review October 2017