DALLAS --The Indiana Finance Authority plans to issue $175 million of state revolving fund bonds, including debt it will designate as green bonds.
The authority designated the $103 million new money Series A portion of the deal as “green bonds," with the proceeds earmarked to fund loans for eligible projects that are verified as environmentally beneficial. Eligible projects are designed to improve the quality of Indiana’s drinking water and reduce pollution in its water supply according to state and federal standards.
The finance authority is also refunding $72.8 million of bonds in a B series. The refunding is expected to generate net present value savings of about $7 million or 9% depending on market conditions. All savings will remain in the program.
Green bonds are a growing segment of the U.S. municipal bond market. Advocates say the designation can expand an issuer’s network of potential investors and help increase demand for the bonds. The bonds can attract investors that are not typically active in the muni bond market, such as socially responsible investing firms and individuals, funds that have climate mandates, and other retail and institutional investors seeking an environmentally positive way to earn income.
"The IFA has chosen to seek the green bond status for two important reasons,” said Dan Huge, director of Indiana Finance Authority. “First, it highlights the important work the Indiana State Revolving Fund performs regarding green initiatives. Second, it brings in a larger investment base to help fulfill a demand from the investment community”.
While demand for the bonds has increased with the green bond designation it hasn’t translated into tighter pricing.
“The IFA has yet to be able to clearly identify a pricing benefit; however, we have identified investors who have participated specifically for the green bond designation,” Huge said.
All three rating agencies assign top AAA and Aaa marks to the state’s program. All also assign a stable outlook.
Moody’s Investors Service said the program’s strong default tolerance remains its core strength. The “program resources enables it to absorb 27.7% of potential defaults of underlying loans without impairing debt service for the life of the bonds. To date, no program participant has ever defaulted,” the rating agency said.
Revenue streams such as water-related taxes or water-related fees provide repayment for the bonds.
Moody’s also noted that Indiana state revolving fund program is in the process of transitioning from what’s primarily a reserve fund structure, wherein loss protection is provided by reserves, to a cash flow structure, in which loss protection is provided by available surplus cash flows.
To date, the Indiana Finance Authority has issued approximately $239 million in green bonds via its SRF program, of which $236 million is still outstanding from 2015 issues, which were also designed green bonds.
Indiana’s SRF loan programs provide low-interest loans to Indiana communities for projects that improve wastewater and drinking water infrastructure. The program's mission is to provide eligible entities with the lowest interest rates possible on the financing of such projects while protecting public health and the environment.
An eligible project is characterized as one that is designed to improve the quality of the state's drinking water and/or reduce pollution in the state's water supply in accordance with state and federal standards. Eligible projects may also include environmental remediation as determined by SRF Acts and federal environmental laws.
Huge said the bonds are expected to price in early March, depending on market conditions. “We are always watching the market to determine the right time to price,” he said.
The deal is currently on the day-to-day calendar. Bank of America Merrill Lynch and Goldman Sachs are the lead managers and Public Financial Management Inc. is advising the authority.
