JOHANNESBURG — The City of Cape Town has just managed to raise an R1bn green bond with the help of RMB. The city plans to use the money raised to help build out more sustainable water infrastructure as well as fund the likes of electric buses. What is also interesting is that the JSE is further planning to launch a green segment in September, specifically for climate aligned instruments to be listed on. BizNews Publisher and Editor, Alec Hogg, interviewed RMB’s Debt Capital Markets transactor, Angela Mokone, to find out more. – Gareth van Zyl
This special podcast is brought to you by RMB and it’s a warm welcome to Angela Mokone. She is a Debt Capital Markets transactor at Rand Merchant Bank. You’ve been doing something very interesting with the City of Cape Town, which is very appropriate giving the climate issues that are happening in the Cape at the moment. But let’s just go back a little bit. It’s all to do with green bonds which seem to be growing in popularity internationally.
Yes, Alec that’s right. The green bond market is still in a fairly infancy stage in SA. Prior to the City of Cape Town issuance there were only two green bonds that have been listed in SA. It is an asset class that is growing quite exponentially in the offshore market and we’re very excited to be seeing some increased awareness and demand for green bonds in our market.
How big is it internationally?
We’ve got some figures that it’s in the range of about US$696bn, but that’s basically climate aligned bonds so, that would be bonds that are specifically labelled and have been accredited as well as bonds that have not been officially accredited but that still serve a climate aligned initiative.
Just explain a little bit more about that, the accreditation.
Speaking specifically about the City of Cape Town issuance, they went through an accreditation process through the Climate Bonds Initiative, which basically involved adhering to set criteria applicable to their various sectors. In Cape Town’s instance that was more aligned to water. That involved going through a verification process, which was conducted by one of the large SA audit firms to confirm that the use of the proceeds meets the requirements of the Climate Bonds Initiative.
So, there’s this organisation called the Climate Bonds Initiative which is based where?
They are based in the UK.
And US$696bn, as you said earlier, which has been issued in these bonds. Why do you think it’s taken so long for SA to catch up?
Based on feedback that we’ve received from a number of asset managers and life insurers, the issue is that for them to establish specific green funds, they would need to see demand from their investors to invest in green assets. I think that is something that is slowly developing in the market. It’s probably taken a little bit longer than what we had anticipated, but we’ve now learnt from the JSE that they are going to be establishing a green segment. I think investors will become more aware of ways to invest in a more sustainable way, which in turn is likely to assist with the development of this asset class in SA.
That’s an interesting point that you’ve mentioned there that the JSE is going to be starting a green segment. Is that a new sector on the big board just devoted to green?
Yes, that’s correct. They will be launching their green segment in September – specifically for climate aligned instruments to be listed on.
Let’s get back to the work that you did with the City of Cape Town. As you explained, it was a bond that had to go through a process with the international authorisation body, the Climate Bonds Initiative. How much money did you raise for CT?
Initially, their plan was to raise R1bn. They had identified R1bn worth of projects that would be eligible to be accredited as green. We received a tremendous amount of demand for the issuance and we managed to get bids of just short of R5bn. They eventually allocated R1bn of those bids.
So, if they had more projects they might have been able to have raised or pull in more money?
Yes, certainly and their intention is also that going forward, they would like to continue to tap this form of fundraising. As they identify more green projects and sizeable volumes of green projects, they will probably want to continue using this platform.
How is the debt priced?
The debt is priced very attractively and very competitively. Our initial price guidance, which we put out to the market was 140 to 160 basis points over the government benchmark bond, which was the R186. We saw pricing coming in below that and the bond ultimately cleared at a spread of 133 basis points – which equates to a coupon of 10.17.
We do believe that currently SA markets are quite buoyant, so we saw a lot of demand, which assisted with the price tension. We also believe that the green aspect of this bond had an impact on the favourable pricing that the city was able to achieve.
Do the investors get any benefit for investing in green bonds?
At this stage, there isn’t any direct benefit. There were a couple of investors who had already established green or climate funds, so this asset suited those specific funds quite well. From a general investor perspective it’s obviously a positive to know that you are holding an asset that does have a social responsibility and environmentally responsible aspect to it.
At 133 basis points when you had an indicated level from at least 140. Even for the uninitiated you could see that you got away with a lower interest rate than anticipated. How long is the bond going to run for?
The bond has a tenor of 10 years, so it will be maturing in 2027. It is an amortising bond, which was based on the City of Cape Town’s preference. There will be semi-annual equal capital repayments during the course of the instrument.
So, there’s ZAR 1bn. They’ve identified the projects. What are they?
The majority of the funds will be directed towards water related projects – particularly around the replacement of water metres and the intention around that is to manage water consumption and water conservation. Regarding this bond – the proceeds are not focused on addressing the larger, water crisis that the city is currently facing — they’re running a separate process to deal with larger scale projects to address those issues. But as I say, there are some water projects that will also receive some of these proceeds. In addition to that, they are also looking to use a portion of the proceeds to buy electric buses, which also speaks to the whole climate change initiative. There are also projects that will look to recycle sewage water into potable water.
Just to put it back and to look at the interest rate. If they were to have borrowed the money elsewhere would they have had to pay more than the 10.17% that they’re paying here?
I guess it’s a bit of a hypothetical question. The city hasn’t been in the market for a couple of years. We do think there was an aspect of the pricing tension, which came through because of the green nature of the instruments. That being said, there is the possibility that they may have paid up slightly more, had the instrument been a conventional bond as opposed to a green bond.
What about the future? We do know there’s a water crisis in the Cape and it’s going to need innovative solutions. If they came up with a massive desalination plant would that be something that you might be able to fund through a green bond?
Yes. Our initial investigations and assessment of the climate bond standard and the criteria that water projects would need to comply with, indicates that a desalination plant could potentially be eligible for funding with green bond proceeds.
Are they looking at those kinds of things?
At this stage, I understand that they’re looking for technical proposals on how to address the water crisis. Once they have credible technical proposals it would then move onto understanding what the funding requirements are and how to actually go about funding these. As mentioned earlier, they have indicated that green bonds are definitely something that they want to include in their funding strategy going forward.
So, you’ve taken the first step. SA has got its very first green bond. What about the private sector? Is this an area that outside of SA the private sector has shown any interest in actually raising money for their own projects?
Yes, we’ve noticed that private sector participants, particularly banks have been quite active from a green bond issuance perspective – using the proceeds that they raise to fund renewable energy deals and other climate aligned projects. We have also seen large corporates, such as the likes of Apple using the green bond market to raise funding to make their existing facilities more climate friendly and more green.
Even in SA? If a company came to you and said, ‘we’re looking to do some work, which would address climate change. We’d like to float a green bond.’ Is that something that is even feasible in the local market?
Yes. That is definitely something on the back of the City of CT deal that we would want to see corporates coming out and issuing green bonds.
It’s almost like you’ve cracked the first big one. Now, it’s going to be listed on the JSE. Will retail and private investors be able to buy into it?
They wouldn’t be able to buy directly into the instrument. They would need to buy via a broker or alternatively, through their asset manager.
But at some point, in time it will be listed on the JSE but are the amounts involved too big for a small investor?
Yes, that’s right. It actually listed on 17 July, but yes, the denominations that instruments on the interest rate market trade at is a minimum of ZAR1m.
All right, so if you really are wanting to support the climate change initiatives get ZAR1m out and speak to your broker and you can get a slug but in time, there might be more of these.
There definitely might be more and I also think that there is scope to have retail bonds that are green bonds to enable the man on the street to make a direct investment into green initiatives.
I think there’s a lot of individuals who would like to see a 10% yield on their 10-year investment, certainly at this point in time. Angela, thank you for enlightening us on the first CBI registered, or authorised green bond issued by the City of Cape Town. Angela Mokone is a debt capital market transactor at Rand Merchant Bank and this special podcast was brought to you by RMB.
