NRG Yield has issued $500 million in green high yield bonds to finance a portion of its $2.5 billion acquisition of the Alta wind assets—marking the first bonds issued by a yield company in the U.S.
Green bonds are characterized by the use of proceeds being funneled to renewable or clean energy projects or assets. The notes have been more prevalent in Europe and by issuers like the World Bank and International Monetary Fund. Utilities across the pond, including EDF and Italian utility Hera have issued notes.
The U.S., however, is largely an untapped market for this type of bond. To that end, lead bookrunner, Bank of America Merrill Lynch, spent the better part of a week educating prospective investors about green bonds as well as yieldcos. The demand for NRG Yield’s 10-year notes was strong and the NRG Energy affiliate upsized its initial $400 million privately placed issuance by 25%. The notes carry a 5.375% coupon (PI, 7/30).
Managing Editor Holly Fletcher talked with Bank of America’s Suzanne Buchta managing director and global co-head of green debt capital markets, and Jeff Kulik, managing director in the global energy and power group, about NRG Yield’s landmark issuance and what it means for the U.S. market.
PFR: What was the rationale for NRG Yield to issue a green bond instead of a regular set of notes?
Kulik: There’s an advantage from the standpoint that the notes could potentially attract a broader universe of investors. We did see what we think were incremental orders from funds or money managers that have a renewable or clean energy mandate or focus. We wouldn’t say this type of investor pool is deep to the point that it’s a driver that is dramatically changing the size, pricing or structure of an issuance. It’s an added feature in terms of the marketing of the issuance and is also an important part, and I think this goes for NRG and NRG Yield, in terms of their strategy and focus, for investors and for public relations.
Buchta: It’s easy for NRG to do these green bonds since they plan to use the proceeds for renewable energy projects anyway. The green feature draws attention to the fact that NRG is purchasing renewable assets. The assets they are purchasing are large and easily eating up the proceeds, as opposed to having to pull together hundreds of smaller projects as some issuers would need to do. It’s almost a no-brainer, which is really why I say that in this instance it was ‘why not issue it in green bond format?’
PFR: Right, right. The guidelines for issuing green bonds are transactional rather than following a set of guidelines from some sort of authority. What does an issuer think about when it considers a green bond and whether that’s going to attract investors that want to amass green bond portfolios.
Buchta: The nice thing about the NRG case and back to the point I was making by saying ‘why not’ is they are putting the funds toward renewable energy projects such as wind, solar or geothermal, which are so obviously green.
I think the first thing other issuers need to do is look at what kind of categories of green or clean energy apply to them and then they need to make sure their documentation for the bonds in the use of proceeds section specifies what those categories are. There is some follow-up reporting that is expected of the issuer to let the public know that ‘yes, we did spend this amount of proceeds on the project, some other amount on another project and all that adds up to the proceeds of our bonds’. Part of the green bond process is to provide data on those projects and the proceeds for the public to see.
PFR: In terms of the high yield market do you think that is a logical place for the green bonds to go?
Buchta: It’s predominately been an investment grade market to date, and was first used by triple-A rated issuers. It has recently been tapped by lower-rated investment grade issues. In fact, some of the issuances we’ve seen have been triple-B and triple-B minus. NRG Yield is the first segue into high yield.
There is a type of green bond, which is what we would call a ‘pure play’, where a company like Vestas or Tesla or someone who’s entire business is about renewables or clean energy in some format comes to the market with a senior bond. That would also be a green bond. That seems like a future potential area for high yield as more ‘pure play’ companies get rated and look to come to the bond market.
But since this ‘use of proceeds’ concept is moving into high yield, as we saw in the NRG Yield issuance, it’s possible we will see companies continue to test the waters there.
The investors we are aware of who care about green bonds and have built green bond portfolios, etc. are for the most part investment grade investors. Some of them cross over into investing in high yield and could get involved with more transactions of this type, but many of them are not able to invest in high yield.
It’s going to be an education process on the investor side to let them know that the ‘use of proceeds’ model is something that issuers will maybe be looking to do in high yield. Typical high yield investors need to figure out how much they care about the fact that it’s green versus just being interested in investing in the credit outright.
PFR: In terms of the transaction for NRG, and I don’t know how much detail you can go into at this point, was there any extra marketing or educating potential investors that you had to do?
Kulik: The marketing process started on Monday, July 28, and finished that Thursday so we spent three-and-a-half days marketing the bonds, which is longer than a typical offering that the parent company would do. If NRG Energy was issuing bonds they would probably do it in a single day.
We had a physical road show for two days followed by two days of conference calls, so there was a lot of extra time spent marketing and educating investors on NRG Yield, and on the green bond aspect.
PFR: In the U.S., could we see more project bonds, such as the Solar Star transaction by MidAmerican? Where are project bonds going to fit in terms of frequency of issuances?
Buchta: It’s probably going to be the smallest group of issuances because a lot of projects are not large enough in size to need to tap the bond market. In terms of how many megawatts they generate and then what that translates to in terms of dollar amount that they need to borrow, they can often borrow those dollars via bank loans. The advantage there is that they can draw down over time when they need the money. They are really only going to the bond market when the bank loan market won’t suffice for the size of financing they need. I don’t think we’re seeing wind farms or solar farms that are large enough and need to do that. It may be that over time you see aggregation of wind and solar farms on balance sheet being put into pools to make slightly bigger projects that require issuing bonds, but the yieldco structure seems to be satisfying from what I can see the need to recycle capital instead of doing it in project bond format.
