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Getting Granular on Green Bond Proceeds: Capex? Opex? Both?

By March 2, 2021No Comments

Some investors prefer that green bonds finance capex projects, but corporates use proceeds for opex, too—with caveats.

How a corporate intends to spend the proceeds from a green bond is integral to deciding whether to issue the bond in the first place. You need to have sufficient uses to create a deal that is large enough to make the costs worthwhile and ensure that investors will participate.

  • NeuGroup members at a recent ESG working group meeting addressed a related, more granular issue of using green bond proceeds for operating expenses (opex) in addition to capital expenditures (capex).
  • Members also discussed the benefits of using the proceeds on fewer, big-ticket items rather than for multiple, smaller expenditures.

A case for big capex. One member said his company chose to use the proceeds from a recent green bond for large capital expenditures, excluding operating expenses and smaller capex opportunities.

  • “This made the post-transaction reporting less onerous,” he said. The company did not want to create a “big workload” in terms of reporting, he added.
  • Following the meeting, another member said, “I think there was fairly broad agreement that capex was preferable to opex,” all else being equal.
  • One reason for that is the preference by investors, especially in Europe, that proceeds from green bonds be used to create new assets that support sustainability.

Capex and opex. Another member’s company is looking into using the proceeds from a sustainable debt issuance for a combination of capex and opex. “Specific to capex, we are exploring how to tie R&D expenditures to particular product offerings,” she said.

  • After the meeting, this member said, “A key takeaway from the meeting from other members who have tied proceeds to capex and [opex] is the importance of clearly articulating the specific ESG value add derived from the service or product funded with green proceeds.
    • “Investors want to know that the proceeds are not simply being used to fund normal business operations.”
  • Another member’s company plans to use proceeds from a multi-tranche sustainable debt deal for both capex and opex. He noted that while investors like to know, companies are not required to reveal the ratio of capex to opex in use of proceeds disclosures.
  • That said, it’s likely “that we’ll allocate proceeds on the longer-dated tranches to longer-lived assets such as green buildings,” he said. That means that shorter-term tranches may fund operating expenses.
    • “I understand that some investors are sensitive to seeing a reasonable match between the tenor of bonds to the life of the eligible projects funded,” he said. He added that his company received different advice from different banks on whether this particular issue mattered.

What about PPAs? Many companies use green bond proceeds to finance power purchase agreements (PPAs) that allow a corporate to buy renewable energy from a third party. PPAs are considered operating expenses, one member explained.

  • He said investors, especially in Europe, “generally consider them lower quality—or even inappropriate—use of proceeds for a green bond.” That’s relevant, he said, is in cases where a corporate is buying power from an existing renewables project.
  • For that reason, this company included so-called additionality in its bond framework. “Our PPAs need to be catalyzing net new renewable energy onto electrical grids—which is partly the goal for investors who are capex focused,” he said.
  • “This additionality theme is a key focus for investors, and you heard several other members mention it during the session,” he said after the working group meeting.

EU green bond standard. A proposed green bond standard in Europe may offer corporates more guidance on which operating expenditures will pass muster:

  • “Green expenditures can include any capital expenditure…and selected operating expenditures…such as maintenance costs related to green assets, that either increase the lifetime or the present or future value of the assets, as well as research and development (R&D) costs.
  • For the avoidance of doubt, OpEx such as purchasing costs and certain leasing costs would not normally be eligible.”

Justin Jones

Author Justin Jones

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