Caitlin Devitt: (
Hi, welcome to another Bond Buyer podcast. I'm Caitlin Devitt infrastructure reporter with the Bond Buyer. And I am here at the GFOA conference in Austin, Texas. It's their 116th conference. So GFOA has been around for a long time. And I'm here with Barry Fick who's the executive director of the Minnesota Higher Education Facilities Authority. He's also a member of the GFOA's debt committee, a very important committee which met yesterday, for a long time. We asked Barry to come be with us today because among the different many interesting things that he said, and that the debt committee talked about yesterday, one of them was about ESG and a recent bond sale that he was part of. As our listeners know ESG is all the rage and it's a very important topic and investors are increasingly interested in it. One of the things that's sort of interesting is does it, or does it not carry a market penalty? And we're still kind of figuring that out. We don't quite know. You talk to different issuers and they have different experiences. So Barry had an interesting experience. And so I was hoping you could tell us a little bit about it, but first, why don't you tell us a little bit about yourself, how long you've been at the authority, how long you've been on the debt committee?
Barry Fick: (
Sure. I'd be happy to, and thanks for having me today. I really appreciate this opportunity. I have been the executive director at the Minnesota Higher Education Facilities Authority for just about six years. Prior to that, I spent a couple of decades as a municipal advisor, working with higher education, healthcare utilities and variable rate clients and deals, student loans. So I got involved in a lot of the complicated financings that we did. And so at, in my tenure at the authority, what I've tried to do is to make sure that we, as the issuer of debt for the private colleges and the state of Minnesota, are able to bring to them kind of the most current cutting edge financings, if they want to consider that or to do a plain vanilla financing, if that's what makes sense for them. So we've been working on that.
Barry Fick: (
And like I say, for the six years that I've been there now, it's been really fruitful and that this most recent financing we did just a couple of weeks ago was for $131 million. It was broken into two component pieces. Each about the same size, one was $60 million. The other one was, you know, $70 million or so. And the beauty of this was that they have the exact same security. They have the exact same maturity, the same structure, serial bonds in the first 15 or so years, and then three or four term bonds at the back end. They both go out to 2052 and they were identical. They were also for the same type of facilities. The one is for a construction of a facility that will be a LEED gold standard building. And that one, we decided in our discussions early on to consider the possibility of getting green certification for that, by that we would look at two options. We could either self certify that it was a green bond, or we could engage a third party firm to do that.
Caitlin Devitt: (
Okay, wait, just before you go on. So this is kind of unique because like you're saying they're really alike, so it's sort of an apples to apples comparison. And that's hard to do in muni land because often everything, even pricing, is difficult, if you wanna say how one thing priced on one day, because there's so many variables in most structures. So that's really interesting. And, um, okay, so you could either self-certify it, or you could get a third party. And so what ended up happening?
Barry Fick: (
We ended up getting a third party verification firm to certify that, we thought that it made more sense to do that, because this is the first time in Minnesota that we've seen a situation like this, where we have these two identical bonds, one being green certified, the other one, not being green certified. And so we thought it would enhance the comparison to have a third party certifications because they are recognized by the industry as someone who does this, they were not the first one by any stretch of the imagination, they've done this for. So we thought it would be helpful. And then the other series of bonds, which is the non-green bond piece, is also construction. Proceeds will be used to purchase capital assets construction and do some renovations on some facilities and buy some land for future expansion of the school. So very similar bond issues from an investor perspective. The primary, if not sole difference is one is green certified. The other one is not green certified.
Caitlin Devitt: (
Okay. So who is the issuer?
Barry Fick: (
The issuer is the university of St. Thomas. It's a school located in urban St. Paul, Minnesota, and they are a more, a fairly good size school, about 9,000 plus full time students. Primarily undergrad. They have some grad programs. They have a law school, they're starting a health sciences program. They have a number of other items on campus as well. And one of the interesting things they've done in the last two years is they are making the move from division three athletics to division one athletics. Okay. So part of this proceeds for this, the land proceeds, for example, are designed to purchase some land at which they can use for a future construction of some division one athletic facilities, which will be required, cuz they just have to be bigger, more capacity than their current division three status.
Caitlin Devitt: (
And who's the finance team? Who are the underwriters?
Barry Fick: (
The underwriter is sole underwriter with RBC Capital Markets. They've worked with the university, previously, not recently. So the university likes to spread their financing around between different underwriters, making sure they get the best possible execution and pricing. And we actually, for this process conducted a very thorough request for proposal process where we looked at probably 15 different firms. And we then worked with the university on that and then they selected RBC Capital Markets as the underwriter for the bonds.
Caitlin Devitt: (
And did you this idea to have to get it certified and to do kind of that split? Was that something that you guys knew ahead of the time or was that something that RBC brought?
Barry Fick: (
It was not something we thought, well, we thought about it ahead of time, but weren't very too terribly serious about it. We knew we wanted to wait until the financing was all put together. And so when we did that, you know, I forget if we or RBC mentioned it. And so RBC, we asked them to take the lead on that cuz they had a little bit more experience than either the authority and certainly more than the university had. So they found the verifier and we interviewed the verifier to make sure that was gonna be someone that would fit with us. And I should also add that an addition, we had North Slope Capital as advisors out of Colorado as the municipal advisor on the transaction. Yep.
Caitlin Devitt: (
Okay. And in terms of investors just before we get, we obviously wanna talk about what happened when you guys hit the market, but in terms of investors, do you kind of have the same group at the authority? Are you sort of familiar with your investor crowd or do you often end up starting from scratch?
Barry Fick: (
We're pretty familiar with the investors that purchase bonds for that we issue on behalf of our borrowers and different investors will prefer different bonds. And clearly, you know, they each have their individual capacity limitations is how much they can take. So we take that into account and work to try and regularly to communicate with the investors when things are going, what we're going to do for next bond issues and that sort of thing. So we have a pretty good handle. We also have some very good statistical background on our website, which allows us to see who's accessing the site and what they're looking for and who they are. Right. Actually, so we can identify them. Right. Which is good for us in terms of looking at future transactions, we're building a database that will allow us to efficiently communicate changes if anything needs to be changed. In addition to posting on EMMA or if we're going to announce a new bond issue for somebody, we can give notice to all the people to make sure they are aware of it.
Caitlin Devitt: (
Right. What were the bonds rated?
Barry Fick: (
Bonds were rated Aa2 by Moody's Investors Service, stable outlook.
Caitlin Devitt: (
Did you talk to Moody's at all about the green thing?
Barry Fick: (
That we did, we did, we specifically talked with Moody's about that and to make sure that they would understand that Moody's has adopted some new reporting criteria in their credit ratings or their rating update or whatever publication they put out, which now specifically has a section that talks about environmental, a section that talks about social and a section that talks about governmental and they started doing that in their higher ed transactions. Okay. So each piece is pulled out and you know, the social piece will talk about, you know, what they're doing at the school and this sort of thing, the environmental piece will talk about the environment for that particular community. And then the governance talks about the governance at the individual school and how that compares that to Moody's medians.
Caitlin Devitt: (
Right. Okay. So what happened?
Barry Fick: (
Well, it was really interesting. What I was hoping was we could determine is if there's a market pricing benefit to green bonds in the current market, you know, I've seen other situations where they've said, well, we think there might have been a benefit, but we really can't tell because we didn't have a you know, A to A comparison basically apples to apples comparison here. I thought, well, let's see what we've got. And so on the day of the pricing, we had the pre-pricing the night, afternoon before, and everything looked good. In the morning, the Treasury market became extremely volatile, rates popped up right away. So we actually delayed going out into the market for about an hour, hour and a half. And we thought, okay, we adjusted the pricing a little bit, not a lot, but just to reflect a little bit of the market. And we brought the bonds out and I was very pleased within five, 10 minutes, we had most of the green bonds sold.
Caitlin Devitt: (
So the green bonds went right away, went first.
Barry Fick: (
Green. Yes. The green bonds went right away while the non green bonds languished.
Caitlin Devitt: (
Okay. There's the, there's a little bit of a penalty we're trying to see.
Barry Fick: (
Right, right. And so that was a bit of a surprise, uh, but not a lot. And so then we thought, okay, now how are we going to find out what the situation is? So RBC underwriting desk, people are talking with potential investors and potential buyers and so on. And, uh, as part of the transaction, we ended up, they ended up, I should say, finding purchasers that were willing to take both the green bonds. And then some of the other bonds. We had an hour and a half order period. And we actually, interestingly enough, we had two things that happened that, and I thought were very helpful. Number one was we had more investors than we typically have seen in the past. And these investors were different investors than we have seen. They were firms that were looking in particular for green bonds.
Barry Fick: (
We had four or five firms that said we would like to purchase the entire green bond issue that you have of $60 million. We had enough orders. We didn't need to do that. And we thought that would be unfair to all the other folks who were putting in orders as well. So we wanted to spread and get a larger investor base, so to speak, of holders of the bonds. And then we also, we used the leverage of having all the green bonds sold to encourage some of them to go, if you want more bonds, we've got these other bonds, right? Same rate, same everything, just not green. So by the time the order period concluded we had all, but about $750,000 of the bonds sold and all the green bonds were sold. Everything ended up being oversubscribed, the green bonds, more oversubscribed than the non green bonds, which allowed RBC to come back and reprice the bonds.
Caitlin Devitt: (
I was gonna ask that. So you repriced it.
Barry Fick: (
Yes. Repriced bonds with a lower, uh, yield. We kept the coupons the same, but we lowered the yield.
Caitlin Devitt: (
What was the yield? The yield let's say for a 10 year.
Barry Fick: (
For a 10 year, it was three and a half or something like that. We ended up with like a four 15 true interest cost. On the bonds. And so you might go, you look at it and you go at the end of the day, the interest rate coupons and yields on both series, the green series and the non-green series were the same. Okay. So you might go, well, there's no benefit. Right?
Caitlin Devitt: (
Sure.
Barry Fick: (
But on the other hand in looking at where we were in the market, where we started and where we ended up, we believe that there was a good benefit from the green bonds because without them, we probably wouldn't have been able to sell the bonds at that level. And we would probably have gone to sell the bonds at a higher rate. So from our perspective and the school's perspective, it was a success.
Caitlin Devitt: (
Okay. We're gonna take a quick break for a message from our advertisers. So yeah, I mean, that's real interesting what you were saying from the outside. You're not seeing necessarily a pricing difference, but the inside baseball on that was that the green bonds acted like a giant attraction to the other. And so you really did see, especially if you're coming into kind of a choppy market.
Barry Fick: (
We did. And I thought that was particularly helpful that as you noted, we were in a choppy market and I would argue we still are in a choppy market. So, to the extent we had something that the market is looking for and has an appetite for, this was a perfect opportunity to see if there would be a benefit from it. And, you know, as I've told people, we did see a benefit from doing the green bonds verification, but it was just, wasn't quite the benefit I expected. Nonetheless, the school is very pleased with the results.
Caitlin Devitt: (
And you got a, a wider investor base, new investors that you've never had before who are now gonna be paying attention, maybe coming back.
Barry Fick: (
Right, right. It was very interesting in the review after the sale, the number of clicks we had on our website in terms of looking at the documents compared to where we have been the last, you know, few months or so, the usage skyrocketed in the week prior to the sale. Okay. As we put out on our website, as well as on RBC's website, headed out to their customers, but you could look at the OS, we had a road show that was on there that the university put together and our access numbers increased dramatically. The downloads increased substantially. Lot of people were pulling down the official statement. And we had a lot of interest from people that, you know, as I'm looking over the names of people who were there as people that I know that I've worked with and have purchased bonds of the authority for many times in the past, but also as you noted or talked about, we saw there were a lot of new folks that we haven't seen. So hopefully we'll be able to replicate this sort of, uh, if not experiment, at least have issues going forward that we can certify as, you know, some sort of green bond or social bond that will help meet the demand of the market. And at the same time, not overly burden the issuer or the borrower.
Caitlin Devitt: (
Yeah. That's one thing. And, and you kind of moved on, cause I was gonna ask you what lessons, but that is sort of one thing. And I think you had said yesterday that it was a pretty modest cost of getting it certified.
Barry Fick: (
Yes. The, the cost of the certification was very modest compared to the number of bonds that we sold. And one of the things that we also talked about with the university at the very beginning was how much ongoing or how much certification they are willing to provide because they didn't don't have the staff to provide super detailed information about how the bonds are compliant with the green verification that was put out initially. So what we're going to do is provide a verification of the green bond status through the construction period. And once we get the final certification of the LEED status for it, but we're not going to commit to doing any ongoing certification for them.
Caitlin Devitt: (
Okay. I see. I see. So it's kind of a new front for you guys, and you can talk about this experience with other borrowers, you know, as a conduit, right? With some of, some of your other credits that are gonna come to market and sort of being able to have this experience. It's interesting. You know, like I said, it's kind of the experience of issuers really seems to, there's not as much consistency yet. We're not seeing it. So that's why we like these kind of insider stories about what happens when, when you come to market with this and let's see the response.
Barry Fick: (
Yeah. And I've observed the same thing, cuz we've been looking at the possibility. I had a one borrower about a year and a half ago who I thought could have successfully marketed their bonds as green bonds, but they were just conservative enough. They didn't want to take the time and the effort to do the certification. And so we did not pursue that, but this one, it made sense to do it. And the university was willing to undertake that, in minimal costs. So not a bad bargain. Fortunately the experiment was successful and I hope to continue on. And with other transactions we do going forward, that'll avail themselves to this side of sort of certification as well.
Caitlin Devitt: (
All right, Barry. Well, that must have been a session that just got out cuz we're starting to hear some ambient noise as the conventioneers are coming toward us. So thank you so much. Thank you for taking the time. Thank you for sharing your experience.
Barry Fick: (
Thank you. I appreciate it.
Caitlin Devitt: (
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