US company NextEra Energy Capital Holdings (Baa1/BBB+/A–) included a “green non-certification event” on its recent seven-year US$1.5bn green bond that introduces a coupon step-up if the company fails to produce an allocation and impact report within a specified time to address investors' concerns about transparency.
NextEra committed to produce allocation and impact certification that is certified by its CFO within two years and 60 days of the bond's issuance, and will pay a 25bp coupon step-up if it fails to do so. The deal is guaranteed by parent NextEra Energy, and priced on June 2.
The certification will identify the renewable energy projects that the green bond proceeds are allocated to as well as the amount of proceeds, the renewable energy capacity of the projects and either a statement that all proceeds have been allocated or details of the amount outstanding.
The 25bp coupon step-up is a feature of the sustainability-linked bond market, which ties pricing to progress against environmental targets, rather than green bonds, which are defined use-of-proceeds instruments linked to specific projects or expenditure.
The application of the SLB coupon step-up to green bonds is designed to give investors some protection in case proceeds are not allocated to green projects as stated, and give investors greater visibility and assurance, according to a note by NatWest Markets.
“This helps deal with some investor concerns around limited post-issuance transparency of certain green bond issuers,” NatWest said.
The fact that this feature has been introduced in the US market is significant, as issuers face greater legal scrutiny for an SEC filing and perceived litigation risk when making environmental commitments or forward-looking statements in prospectuses, the bank said.
However, the certificate does not fully address investor concerns as it is certified by the company itself and is not subject to an external review by an auditor or environmental agency. It also explicitly states that the underwriters are not responsible for any review or monitoring.
Bank of America, Barclays, Credit Suisse, JP Morgan and Morgan Stanley were underwriters on the deal, which priced at 65bp over Treasuries with a 10bp make whole call.
Renewable projects
As with most green bonds, the deal includes a risk that what the company considers “green” may not meet investor requirements, although the renewable energy projects that NextEra has detailed are expected to fit the criteria, NatWest said.
NextEra has identified US$1.525bn of expenditure across seven renewable energy projects with1.2GW capacity. Funds will finance the development, construction, installation and acquisition of repowered wind projects, solar projects and battery storage.
The company had total assets of US$128bn at the end of 2020, including Florida Power & Light Company, the largest energy company in the US by retail electricity produced and sold. It invested US$14.6bn in US infrastructure in 2020, which makes it one of the largest capital investors in the US, according to the company’s 2021 ESG report.
NextEra is aiming to reduce emissions by 67% by 2025 from a 2005 baseline, which is equivalent to a near 40% reduction in absolute CO2 emissions despite doubling its expected electricity generation at the same time. From 2005 to 2020 NextEra reduced its rate of CO2 emissions by 56.6%, absolute CO2 emissions by 24.2% and increased clean energy generation by 74.6%, the ESG report said.