Canada’s green bond market is gaining traction with the City of Toronto the latest borrower to lock in cheaper financing than would have been possible through a conventional debt sale.
The country’s financial capital sold a C$130mn ($101mn) green issue maturing in 2039 on Tuesday at a spread of 118 basis points over the nation’s yield curve. That’s two to three basis points tighter than where a regular bond would have priced, according to Randy LeClair, the city’s director of capital markets. The transaction, which marks the completion of Toronto’s funding plan for the year, saw demand of about four times the amount of debt issued with orders placed from 36 investors.
This pricing advantage has become more prevalent in the euro and US dollar market, but at least four borrowers have said they’ve had a funding cost benefit by selling green bonds in Canadian dollars versus conventional debt. And more issuers could be on the way, including a potential debut next year from the federal government, whose securities are used as a benchmark to price other debt sales in Canadian dollars.
“Canada is just starting to develop this market whereas Europe is already well advanced. So there is ample room here to issue for both companies and governments,” Max D’Alessandro, a fixed-income portfolio manager at FDP in Montreal, which manages C$1.6bn of assets. “Issuers right now have the upper hand and can issue at tighter spreads than their conventional bonds.”
In Europe, where sustainable debt markets are more established, some companies such as Volkswagen AG have obtained a double-digit price advantage, while in US dollars the average gap between green and conventional securities is 8 basis points, according to December 1 estimates from Bloomberg Intelligence.
While issuance of ESG bonds out of Canada is rising, it remains a fraction of the total debt outstanding in the country. Sales of sustainable bonds rose to $9.1bn this year compared to $8.8bn in the same period a year earlier, according to data compiled by Bloomberg. Sales of Canadian dollar corporate bonds this year are around C$106bn.
In October, the Province of Ontario priced its largest-ever sale of green bonds “slightly through” its own benchmark curve, the issuer said on its website. In the corporate bond market, Vancouver-based QuadReal Property Group Ltd and utility firm FortisBC Energy Inc said earlier this year that green bond deals allowed them to reach a funding advantage.
In the international debt markets, CIBC priced $500mn of five-year green bonds at around 4 basis points and 15 basis points through the lender’s yield curves in US and Canadian dollars, respectively. On Thursday, National Bank of Canada priced a dollar-denominated four-year sustainable bond callable after three years with a negative new issue concession.
The Canadian market may get another boost from the government’s plans to introduce a Sustainable Finance Action Council early next year to make recommendations about steps needed to broaden the appeal of the financing.
Demand for green bonds out of Canada is also being fostered by orders from international investors, which in Toronto’s case took about 25% of the deal, LeClair said. Proceeds from the sale will be used for projects including Toronto Community Housing energy efficiency retrofits, the Port Lands Flood Protection Project and Toronto Transit Commission subway tracks, the city said in a statement on Wednesday.
“The ESG/green investment theme is gaining a lot of momentum and there is a constant pipeline of products being developed. Essentially there’s too much money and not enough product at the moment, D’Alessandro said. “In the coming years, expect a bigger supply of these types of bonds which should help reduce this gap.”