Contact lights the path for green corporate issuance in New Zealand

In August, Contact Energy (Contact) finalised a NZ$1.8 billion (US$1.3 billion) green borrowing programme – the first such certification completed by a New Zealand issuer and also the largest-ever single green certification by the Climate Bonds Initiative (CBI). KangaNews spoke to Louise Tong, Contact’s Wellington-based head of capital markets and tax, about the thinking behind the initiative, the process and debt-issuance plans.

The proceeds of Contact’s programme will be used to finance existing and future renewable generation assets that meet the CBI’s green-bond principles and climate-bonds standard. The bulk of the company’s geothermal assets already qualify, and Tong believes standards for hydro-power inclusion should emerge in the relatively near future.

All Contact’s existing bank debt, commercial paper and term bonds are now certified as green under the programme. The company also finalised a new NZ$75 million bank facility with ANZ – which assisted the implementation of the programme – as its first new green-certified debt issuance.

KangaNews Can you explain what led Contact to this initiative and what the company’s motivation is?

TONG Contact has been focused on sustainability – building out our renewable generation and reducing carbon emissions as well as sustainability more broadly – for years. I was also aware of a groundswell of interest in sustainable finance coming from the financial-markets community. It got to the point where it seemed apparent to me that these two trends were crossing over.

I floated the idea with our CFO and found him to be very supportive, on the basis that the initiative is perfectly aligned with Contact’s purpose and direction. I then flagged the idea with the board, giving them the chance to add any insights or concerns while we were still in the early stages. They were also very supportive.

It was in early-to-mid Q2 this year when we started having these serious internal conversations. We felt this gave us the luxury of time, because we wanted to run the process to allow the launch to coincide with our annual results in August.

As for why we went through this process, I think it’s fair to say we have never been afraid to innovate with our funding – and indeed we have done so on a number of occasions. A green borrowing programme aligns well with our corporate culture and values, I think – and should help kick-start this aspect of capital markets in New Zealand.

We also believe this programme should help shine a global light on the low carbon generation assets we are blessed with, especially our recently built geothermal assets. We have a global shareholder base, and this type of activity really resonates with these investors’ interests. It may even put us on the radar of new shareholders as well as debt investors.

KangaNews How time-consuming and costly was the process of establishing a green borrowing programme?

TONG The cost aspect is fairly straightforward – it was relatively small in dollar terms. We watch every dollar that goes out the door, even if it doesn’t have a significant impact on overall funding cost – which this programme did not. I’d call it a miniscule cost, in the context of the size of the debt portfolio covered. In fact, process and cost efficiencies were one of the reasons we went for a portfolio approach to green accreditation.

As for human resources, if you add up the amount of hours devoted to the green programme within Contact it was probably about the same as we’d need to bring a same-class-exemption bond to market, but with the weight of workload falling somewhat differently. There was some legal involvement but not very much, for instance, whereas legal is heavily involved with bond issues. The bulk of the work was done by myself, by our financial accounting team – who were also working on year-end results – and by one person in particular from our sustainability team. Towards the end there was a bit of work around investor relations material and comms – in fact the latter is ongoing I’d say.

Going forward, the workload should be very manageable. In fact, we have just done our first monthly reporting since finalising the green programme and our sense is that our half- and full-year reporting is actually going to be significantly streamlined because of the work setting up and automating the monthly reporting for our green borrowing programme. This was an unexpected but positive outcome.

“I think we will see widening in the primary space between the opposite ends of the market – between certified green bonds and, say, a coal or tobacco company. In fact I suspect this will happen quite rapidly, and certainly quicker than I would have thought possible a year or two ago.”

KangaNews Where does the programme leave future issuance? Contact has significant hydro-power assets and these are not yet covered by CBI principles, for instance. Does this mean the company won’t necessarily be able to issue all its debt in certified green format?

TONG The ratio of our current certified green assets to green debt instruments isn’t much greater than one, so there isn’t a lot of headroom. For this reason, we had to select some existing debt to strip out of the certification, and we elected to exclude our 2018 capital-markets maturities. Nonetheless, the size of the green borrowing programme is large at around NZ$1.8 billion – apparently the largest single certification the CBI has done to date.

Assuming the CBI develops criteria allowing hydro assets to be brought into the programme, you can assume all our future debt issuance will be certified green. CBI has a clutch of asset types listed as “coming soon” on its website, and hydro power is among these. There are still some issues being grappled with, I believe, but the intent – and a technical working group, on which Contact has a seat – is in place.

KangaNews What expectations does Contact have for new debt issuance in the coming years?

TONG Typically, we tend to access one of our two traditional capital markets each year, these being the domestic retail-format bond market and US private placements (USPPs). We did a retail bond this year and, all things being equal and assuming it makes economic sense at the time, we will likely issue a USPP next year. If we go ahead with this transaction – and we have been able to bring our hydro assets into the programme – we will market the deal as a Certified Green USPP.

We understand that the green borrowing programme is the first in the world to be set up to cover multi-product, multi-tranche certified debt instruments. We deliberately set the programme up this way so we could efficiently continue to issue certified green debt into the future without having to reinvent the wheel each time.

KangaNews Other borrowers say they don’t tend to see a pricing advantage from issuing green bonds but they are able to diversify investor interest. What does Contact expect from the green programme when it comes to investor outcomes?

TONG I must admit that I used to be quite cynical about this. Going back a year or more, whenever anyone talked to us about green issuance I tended to feel that if investors were really trying to drive change through this asset class they should really be willing to pay a premium to make funding of low carbon assets more attractive.

More recently, we have started to see differential pricing emerging in the secondary market. I think we will see widening in the primary space between the opposite ends of the market – between certified green bonds and, say, a coal or tobacco company. In fact I suspect this will happen quite rapidly, and certainly quicker than I would have thought possible a year or two ago. There is certainly a groundswell of focus on this issue from investors.

As far as I’m aware, there aren’t any certified green funds in New Zealand. But even this will start to change. There can’t be funds without assets, and I think if someone is going to get the ball rolling here it probably has to be the issuers.

KangaNews Some issuers tend to favour specifically mandated green funds with their green-bond issuance, though this is perhaps more prevalent at high-grade level than in the corporate space. How do you plan to approach allocation from the green programme?

TONG Looking at next year’s planned USPP issuance, we will certainly give some consideration to whether we should plan for a specific allocation to green funds or investors that have a specific desire for certified debt. We haven’t reached out across the USPP investor community in meaningful way as yet so I can’t say definitively what our decision will be, though.

I have had some email conversations with a few of our USPP investors since we launched the green borrowing programme. The feedback from these has been that investors expect to see growth in issuance that is explicitly characterised as green, and that green mandates will transpire at some point. But USPP is a very mature, conservative market so I think it’s fair to expect it to lag the global trend in this respect to some extent.

KangaNews How did Contact land on the specific approach taken, for instance the use of CBI standards and engaging EY to provide independent assurance? Did it seem that there was an obvious ‘default’ way of going about the process or could you have done things differently?

TONG We could simply have labelled our bonds as green. But, just as I’m a fan of formal credit ratings, I think it makes things easier for investors if we back our ‘green asset’ claims by the use of credible, scientifically based criteria. It’s a clear line in the sand for us and for investors, which is the most transparent way to go.

However, certification is certainly a lower hurdle to achieve than a credit rating when it comes to our workload – it really wasn’t that hard. I think we would be selling ourselves short if we hadn’t taken this approach.

As for the independent verification aspect, following a brief RFP process we decided to appoint EY because it had relevant experience, a dedicated team in our region, good understanding of the technical criteria and an established relationship with ANZ – which guided us through the process. EY also has a seat on the technical working group for hydro power, which puts it in a good position to undertake verification of our hydro assets once the criteria are finalised.

KangaNews Have you had much contact with peers on this initiative, either in advance – seeking others’ experiences – or from interested parties after you made the announcement?

TONG I have had other borrowers coming to me since we announced the programme asking for more information about the ‘how’ and the ‘why’. We are the first New Zealand company to have certified green debt, so awareness and understanding of what’s involved is pretty limited – but people are curious to learn more. We’ve had great feedback when sharing the story on social media, through platforms like Contact’s LinkedIn and Facebook pages, and directly from investors meeting with senior management as part of our year-end results roadshow.

The ANZ sustainable finance team guided us through the work involved in putting together the programme. This team had experience assisting other corporate issuers through the process in Australia – Investa Office Fund and Investa Commercial Property Fund – and ANZ Banking Group has issued green bonds in its own name. This meant ANZ had a good understanding of what was required and could explain how it all worked, help us devise the approach, and provide assistance with written material and documentation.

As the certification regime is deliberately very transparent, I also made good use of all the material available online through CBI’s website and on the web pages of other Australasian green bond issuers such as Monash University, Queensland Treasury Corporation and Investa.