The Buffalo Sewer Authority in New York has closed on a $49 million municipal environmental impact bond deal, the largest such deal so far in the United States.
The tax-exempt bonds, priced by Morgan Stanley, will finance green infrastructure and stormwater mitigation projects across the city and are linked to stated performance goals.
“The city of Buffalo is delighted to successfully bring the bond issuance to a close," Mayor Byron Brown said in statement Thursday. "Thus far, along with being the largest EIB in the country, it is also the largest investment any Great Lakes city has made in green stormwater infrastructure, which has proven to be an effective climate resilience measure. The investment also will lead to approximately 700 family-sustaining jobs in our community.”
Morgan Stanley priced the $49.16 million of Series 2021 sewer system environmental impact revenue green bonds on June 4 to yield from 0.06% with a 3% coupon in 2022 to 1.29% with a 4% coupon in 2036. A 2049 maturity was priced a step coupon bond at par to yield 1.75% while a 2051 term bond was priced to yield 1.83% with a 4% coupon.
The deal received an underlying A-plus rating from S&P Global Ratings; the 2030 to 2036 maturitiesare insured by Build America Mutual and rated AA by S&P.
The deal garnered widespread interest across the muni market, sources said. Investor interest was not limited to New York State residents, but was also seen across the country by institutions and retail.
Among ESG-centered buyers alone the deal was 1.87 times oversubscribed while among the wider market the offering was oversubscribed multiple times. Retail buyers, one source noted, were not limited to only high net worth individuals placing $1 million+ orders — there were numerous mom and pop investors putting in their orders for the bonds in much lesser amounts, and the broad-based demand helped drive the pricing.
EIBs are supported by verified third-party evaluations on whether key stated environmental goals were achieved by bond-financed projects.
Arcadis N.V. is the independent third-party validator and will inspect each green infrastructure project site and perform measurements to determine whether the stated outcomes have been achieved.
They are different from traditional green bonds, which support climate and environmental projects but don’t require the same high level of measurement, reporting and outcome as EIBs do. This bond issue qualified as both as an EIB and as green bond under the International Capital Market Association's Green Bond Principles.
"The Buffalo Sewer Authority's willingness to undertake resiliency projects and measure and report on the outcomes positions the authority as a leader in the green and sustainability bond marketplace," Joe Abramson, vice president in public finance at Morgan Stanley, told The Bond Buyer Friday.
The authority said the idea for an EIB issuance came after the Ralph C. Wilson Jr. Foundation and the Community Foundation for Greater Buffalo provided funding to Environmental Consulting & Technology Inc. to come up with alternative financing options for the Greater Buffalo region.
ECT worked with Quantified Ventures, which had previously supported innovative and successful outcome-based financings. In 2016, Quantified Ventures and the District of Columbia Water and Sewer Authority
The Buffalo Climate Vulnerability Assessment estimates that by 2050 the city may see up to four inches of additional rainfall annually, increasing the risks of heavy flooding. Building green infrastructure can help mitigate the impact of heavy rains by constructing preventive measures.
As part of the authority’s “
“In Buffalo, we see a well-managed utility that provides an essential service. The authority has a substantial capital program to support their long-term efforts to reduce combined sewer overflows, but they are well positioned to afford it,” Howard Spumberg, a managing vice president in BAM’s East Region public finance group, told The Bond Buyer. “In reviewing the transaction and the projects that will be funded as part of the ‘Rain Check 2.0’ program, we verified that they align with the International Capital Market Association’s Green Bond Principles, so this issue was included in the BAM 'GreenStar' program.”
The issue incorporated several new and innovative features.
"Influenced by sustainability-linked bonds in the corporate bond market, this transaction innovatively ties the call date and price to the authority's ability to achieve an outcome threshold subject to external verification," Abramson said. "The novel structure highlights the authority's commitment to a more sustainable and equitable community and helped reduce financing costs to historically favorable levels."
The EIB includes an option to refinance or retire the bonds in seven years or more if 200 new acres of impervious surface area financed with the bond proceeds is built. This could give the authority financial flexibility and lower debt service costs if the threshold is met. If the authority does not meet it by 2028, it can still call the bonds, but at a higher cost.
The authority was advised by Capital Markets Advisors while Barclay Damon LLP was bond counsel.
"Morgan Stanley is very pleased to have led this successful and cutting-edge financing in the U.S. muni market," said Zachary Solomon, executive director and head of Morgan Stanley's public finance project finance and sustainable infrastructure group. "We applaud the authority and the investors who participated for their creativity and commitment to driving impact. The transaction certainly represents the evolving nature of ESG and impact integration in the muni market.”
Advocates of EIBs say they
