CHICAGO – The Illinois Finance Authority attracted new investors and greater retail participation on its first “green” designated state revolving fund issue this week.
The IFA received $300 million in retail orders, more than half the par size of the $450 million deal — compared to $210 million on its $560 million 2017 deal — during a retail order period Tuesday. That’s a rarity for Illinois paper given it is handicapped by the lack of a tax-exemption on state income taxes that most states offer.
The green designation and chance to own Illinois paper that carries top ratings of AAA from Fitch Ratings and S&P Global Ratings, and the deal’s structure that offered a range of coupons catering to demand, helped.
The sale attracted orders from more than 40 institutional investors totaling $674 million, including a dozen new ones, the IFA said. Bank of America Merrill Lynch ran the books.
“The financing was anchored by a very robust retail order period of approximately $300 million in orders and strong interest by a green bond investor. In addition, the bond issue saw interest from a broad spectrum of institutional investors,” said IFA executive director Chris Meister.
Since the finance team can’t pin-point the exact purchasing motivations for all buyers, it’s hard to gauge the impact of the green designation, the IFA acknowledged, but they held a direct call with a green bond investor to discuss the projects being funded and the IFA’s commitment reporting.
That investor “ended up being the largest investor during the retail order period,” the IFA said. “We believe the ‘green’ designation had a significant impact on the result.”
The projects adhere to federal Clean Water Act and Safe Drinking Water Act rules and the IFA pledges to adhere to the International Capital Markets Association’s Green Bond Principles, which lay out voluntary guidelines on what use of proceeds qualify, a process for project evaluation, management of proceed, and reporting requirements.
The bonds captured a true interest cost of 2.80%. Spreads on maturities offered on maturities up to 10 years offered 5% coupons and a spread of seven to 25 basis points to the Municipal Market Data’s top-rated benchmark, 30 basis points further out on the scale with a 5% coupon and 75 basis point spread on a 3.25% coupon, according to a pricing wire.
The 10-year maturity was that priced Wednesday for institutions and repriced landed at a 2.19% yield, 29 basis points over MMD at the market close the previous day and the long 22-year bond yielded 2.90%, a spread of 35 bps. Both offered 5% coupons.
Proceeds will fund loans to finance eligible wastewater treatment and sanitary sewerage facilities and drinking water facilities and cover $23 million in state matching funds needed to leverage federal funds. The current loan interest rate is 1.84%.
The IFA expects steady issuance going forward every 12 to 18 months. Over the next two decades there’s an estimated $32 billion need for water and stormwater infrastructure work in the state.
Citi was also a senior manager on the deal. Five firms are co-managers. Acacia Financial Group Inc. and Sycamore Advisors LLC are advising the authority. Katten Muchin Rosenman LLP is bond counsel.
The deal marks the IFA’s fourth under an expanded program dubbed the Clean Water Initiative with previous financings in 2013, 2016, and 2017. The IFA’s predecessor authority sold SRF bonds in 2002 and 2004.
The 10 borrowers with the largest outstanding loans account for 57% of the total outstanding balances of pledged loans. The Metropolitan Water Reclamation District of Greater Chicago is the largest participant, with $686 million in loans outstanding, about 21.4% of the pool. MWRD carries double-A to triple-A ratings. Chicago is second with a $630 million loan balance that accounts for 19.7% of total loans.
