Financing of green cars has become more easily available and affordable through the introduction of the first green bonds from an auto finance company.
In March 2014, Toyota Financial Services issued the US$ 1.75 billion green bond offering (which was increased from its original $1.25 billion due to strong investor demand). Proceeds of the bond will fund new retail finance contracts and lease contracts for qualified Toyota and Lexus hybrid or alternative fuel powertrain vehicles. Everence and the Praxis Intermediate Income Fund purchased a total of US$3.5 million in the auto industry’s first-ever asset-backed green bond.
Automotive Industries (AI) asked Benjamin J. Bailey, CFA, Fixed Income Investment Manager, Everence Financial and Advisor to Praxis Mutual Funds how he sees the growth of automotive green bonds.
Bailey: At this point Toyota brought the first green asset-backed security (ABS) deal. It is an exciting new step in the green bond market. We are hopeful that Toyota and other companies with strong hybrid sales will be able to bring similar deals in the future. At some point it would be great if there would be a green bond on the corporation itself.
A green bond on the corporation where the money is used for their renewable energy projects or energy efficiency projects of the company would be a great step and would be similar to other corporate green bonds that have been issued.
AI: What brought Everence and Toyota to the first assetbacked green bonds?
Bailey: We have been involved in the inaugural issuance of many other parts of the green bond market such as the first U.S. public supranational green bond, the first U.S. corporate green bond, and the first solar panel ABS deal. We were excited about the step that Toyota was making to bring the first green auto loan ABS deal. Supporting a deal where Toyota is using the proceeds for green cars is just the type of new deal that we want in the fund.
AI: Since this is the first such bond from an automotive finance company wasn’t the risk high?
Bailey: The risk really isn’t high from a credit perspective because the underlying collateral of the deal is very similar to previous Toyota ABS deals. The underlying loans aren’t necessarily on green autos. It is the use of proceeds that go towards green autos. So we don’t view this as any more risky than any other Toyota auto loan ABS deal.
AI: How risky are green bonds?
Bailey: It is difficult to put green bonds in a general category and say whether they are risky or not. There are many green bonds that are on supranational securities like the IBRD and IFC (which are part of the World Bank Group) and we don’t view these as risky at all. On the other hand there are other bonds that we put in the green bond category and the underlying collateral is on wind or solar projects and those can be riskier. So, it really depends on the green bond deal itself.
AI: Why is it important for automotive companies to go down the path of green bonds today?
Bailey: This is a growing part of the bond market and it is important for these companies to bring on new investors. Companies always like to increase the “investor pool” and this is one great way to do it. Plus there are huge demands on car manufacturers to continually raise the fuel economy on their vehicles, and this is one part of the investor community that really wants to support this goal.
AI: Tell us a little about the philosophy behind the Everence investment strategy in green technologies.
Bailey: The Praxis Intermediate Income fund is a bond mutual fund that is benchmarked against the Barclays Aggregate Bond Index. Our goal is to outperform the index while investing under an SRI (socially responsible investing) or ESG (environmental, social, governance) framework.
For years we screened out companies from the fund, but over the past 5-6 years we have been very intentional about adding companies to the bond fund that make a positive impact on the world. Green bonds are just a part of this positive investing that we do. We have other investments in affordable housing, education, immunization, community development among other areas