Sean Williamson: Good afternoon, everyone. If you're here for the Bond Financing for Energy Efficiency energy webinar, you're in the right place. We'll get started in just a couple minutes as we wait for folks to log in. Thanks.
Good afternoon, everyone. For those of you here for the Bond Financing for Energy Efficiency and Renewable Energy webinar, you're in the right place. We'll get started momentarily as we wait for folks to roll in. Thanks.
All right, it's about three past the hour. So, I think we can get started. Thank you to our attendees for attending today's webinar, "Bond Financing for Energy Efficiency and Renewable Energy Overview for State and Local Leaders. My name is Sean Williamson and I'm an advisor for partnerships and technical assistance at the U.S. Department of Energy. My role here is to develop and disseminate technical assistance related to financing for energy efficiency and renewable energy goals as it relates to state and local government initiatives. I'm joined today by Elizabeth Bellis Wolfe from the Energy Programs Consortium who will be our content expert as it relates to bond financing.
The purpose of today's webinar is two-fold. First, we want to inform state and local governments about how bond financing can be leveraged to support their energy efficiency and renewable energy goals. It's DOE's goal to make sure that state and local governments, particularly energy managers, decision-makers understand that bond financing is a viable path to project and program financing. Bond financing is complicated but it doesn't need to be intimidating. So, we're hoping to leave you all feeling that there's a sense that bond financing can support your community's energy efficiency and renewable energy goals as now come in this webinar and to leave you with some resources on digging a little bit deeper, which is the second main purpose of this webinar, to share with you some case studies, reports, and tools for gauging whether or not bond financing is an appropriate avenue to meet your goals.
A couple of housekeeping logistics before we dive into the webinar. First, I want to emphasize that the webinar will be recorded. The transcript and slides will be available online at the state local solution center, the website that you see here. Furthermore, attendees are in listen-only mode at the moment. If you have questions as you go through the webinar, feel free to type them in. We will address them at the end via a Q&A section. Don't hesitate to ask questions after the webinar as well, as I will have my contact information as well as Elizabeth has hers, too. That's the agenda.
What we're going to be talking about today will consist of the following. We want to give some legislative updates on recent changes to the federal tax code as it relates to bond financing and the space for energy efficiency and renewable energy. Next, we'll talk about what bonds are and who uses them. Then, we'll go into some case studies including how bond financing has been used to support or in conjunction with energy savings performance contracts as well as streetlight upgrades.
Then, finally, we'll go over some important questions to ask yourself when considering bond financing. At the end, we'll have some time for Q&A from our attendees. Finally, I'd like to share some Department of Energy resources on bond financing before we part today. So, with that, I will turn it over to Elizabeth Bellis Wolfe.
Elizabeth Bellis Wolfe: Thank you very much, Sean. Hi everyone. Thanks for joining us today to learn more about your options for using bonds to finance energy efficiency and renewable energy projects. First, as Sean mentioned, many of you may be aware but for those who are not, the Tax Reform Act recently eliminated tax credit bonds including qualified energy conservation bonds effective as of December 31, 2017. So, those bonds, many of which came into the code in the 2000s, QECBs for example in 2008, can no longer issued even by state and local governments that have not used up their entire allocation. However, if you already issued a tax credit bond, those previously issued bonds are effectively grandfathered, meaning that the special subsidy and credits that were associated with them should continue to be received to the extent that the bonds were otherwise eligible and continuing to comply with the tax code rules.
So, that repeal left many people wondering, "Well, if I can't use tax credit bonds anymore to accomplish my energy efficiency and renewable energy goals, what can I use? What are my options remaining?" The good news is that state and local governments still have a lot of options for financing these types of projects including a lot of different ways to use bonds to finance these projects. So, in addition to facilitating, supporting and encouraging private issuers who might be interested in issuing bonds to finance their projects, state and local governments can still issue bonds directly to finance these projects.
States and local governments that do issue bonds directly also have a number of options kind of within that universe, even taking away tax credit bonds. So, there's still the question of or the option of tax-exempt bonds, taxable bonds, standard municipal bonds, private activity bonds – those were very much in jeopardy during the process leading up to the tax reform legislation but they did survive – General Obligation bonds versus some more limited obligations being offered to support the ability to repay. Then, finally, we'll also talk about some newer kind of flavors of municipal bonds for these types of purposes including green bonds and similar labels and certifications that some issuers are obtaining in connection with these types of issuances.
Before we get started, I'll turn it back to Sean for a poll question.
Sean Williamson: Thanks Elizabeth. So, we have a couple poll questions to ask our attendees today. You should have had the question pop up on your screen. So, take a couple seconds to read that and answer.
So, the response is 100 percent for state and local government entity. That's perfect. That's just the audience we're looking for in this webinar where maybe you don't have the background specifically on issuance of bonds but you want to understand – so you might work with finance authorities, for example, to do that, to ultimately support your policy goals that are finance those initiatives. So, perfect. With that, I'll turn it back over to Elizabeth.
Elizabeth Bellis Wolfe: Thanks Sean. So, we'll start today with a little bit of a bonds 101 for those of you who might be very familiar with energy efficiency and renewable energy technologies and policies but perhaps a little bit less familiar with some of the nuts and bolts of bonds. We'll start off with that and familiarize you all with the vocabulary and terms we'll be using in the presentation.
So, for the purposes of this presentation, we're talking about bonds that are financing instruments, types of debt securities that many different types of issuers – public, private, non-profit – can use to fund capital expenditures that might be more significant than what they can pay for out of their ongoing receipts alone. People who invest in or purchase those bonds, we often call them bond holders. Those folks have essentially lent your state or local government money, which is referred to the principle or, in some cases, the bond proceeds. They've lent it to you in a form that's more easily tradable. So, should they decide, "Mm, I think I don't want to be in this situation of lending anymore; I'd like to sell my position to somebody else," that's easier for them to do with a bond than they could if it were a more traditional loan-type security.
Unlike stocks and other equity investments, one characteristic feature of bonds is that they are typically fixed income, meaning you have a fixed rate at which you are sort of paying interest on the amount that was borrowed. When I say fixed rate, that could be a truly fixed rate, something like I'm paying five percent compounded over the course of the life of the bond, or it could be that you are agreeing to pay a certain fixed spread, as it's called, over what's known as an index. So, for example, you might have heard of the treasury rates, the rate on treasuries as a way of understanding what borrowing costs are in the economy. So, someone might say, "I'm agreeing to pay two percent above whatever the rate is on treasuries at that given point." That allows, especially for longer term bonds, some degree of indexing for inflation so that they – to the extent that the economy is changing, there's less of an incentive to either buy back the bonds or discount them due to effectively better options elsewhere.
So, as I mentioned, of course, bonds are used by many different types of issuers and municipal bonds are a subset of that general, very large market in the United States. What makes a municipal bond a municipal bond is the fact that it's issued by or on behalf of a state or a local government. Just as an aside there, many of us think of the word municipal and we think cities, states, or villages. But in the bonding context, municipal can just as well mean a state bond or a state agency that might be issuing a bond and that would equally be referred to as a Muni Bond. Municipal bonds are often known for the feature that they are often able to be issued as tax exempt bonds.
What that means is when the bond holder purchases your bonds and lends you the money, when you make interest payments to them for the use of the money they've lent you, they can exclude those interest payments from their income when determining how much they owe for taxes that year. In most cases, U.S. federal income tax but also in many cases state income tax, there's sometimes exclusions as well. That can mean that a bond holder is willing to charge a lower rate of interest on a municipal bond than they otherwise would be because they know that they won't have to pay tax on the amount they receive, unlike the tax they would pay if it were just a standard corporate or a taxable bond.
Another option, though, is taxable municipal bonds. Not all municipal bonds need be issued as tax-exempt bonds. Tax-exempt bonds are typically issued for governmental purposes to finance government-owned property or improvements there, too. In some cases, municipalities and states have reason to support purposes that for tax purposes aren't considered purely governmental or might be financing improvements to property that's not owned by that government. In those cases, private activity bonds are a possibility.
Private activity bonds are sort of a subset of municipal bonds that can be issued for non-governmental purposes or for non-government owned property up to a cap. Each issuer has a cap that's set annually based on population. Now the sort of catch default is interest on these private activity bonds is taxable unless these bonds fall into a special subset that are known as qualified private activity bonds. There's a whole list of different types of private activity bonds that can be qualified. Some examples would be exempt facility bonds, for example. So, many airport terminals you'll see were financed using tax-exempt exempt-facility bonds as a subset of private activity bonds. So, these things are everywhere.
You don't need to go back but just one further note. Many of you who may have been around for a little longer might have heard the old term, industrial development bonds. That was a precursor or predecessor to the current private activity bonds. So, if you see IDBs instead of PABs, there's a lot of similarities there in those two terms.
So, even within municipal bonds, there are many and different flavors and types. One of the most important basic distinctions when thinking about municipal bonds is, "Are these General Obligation bonds or GO bonds or are they some other more limited type of obligation?" So, General Obligation bonds are kind of the strongest form upon us that a state or local government can make.
What they're saying is the state of local government is pledging its full faith and credit, its full ability to actually raise taxes on its constituents if the funds aren't – from the project or their other intakes aren't sufficient to cover payments. It's for that reason, actually – and we'll talk about this later – that in some cases, depending on local rules, General Obligation bonds may well require a vote of those taxpayers because they may in effect be on the hook to pay if there's a problem with the project that was financed, if they don't want their issuing authority to go under.
So, because that's a big promise, there's also a whole sort of slew of other options. Most typically would revenue bonds. So, the distinction here is a revenue bond is issued and the issuer is saying, "Hey, I'm not necessarily – I'm not pledging the fact that I could issue – I could raise taxes here. All I'm really pledging is the fact that I am using these bond proceeds to build a project and that project has real revenues and those revenues should be enough to pay you back what you lent me plus the interest that we've agreed to."
Some cases that additional reserves might be set aside. There's some kind of in-between options, limited obligation bonds where perhaps a certain limited portion of the tax and authority or up to a certain cap might be pledged to the project. So, these are just the kind of platonic ideas of security options. There are also subsets.
But in our research, we've noticed – EPC has noticed that probably – certainly the majority and maybe even this three-quarters of sort of municipal bonds for these types of purposes tend to be issued as revenue bonds. So, for example, we're looking at bonds that were labeled as green and issued between I think it was 2005 and 2017, about 75 percent of those were actually issued as revenue bonds. You might wonder why that is given that the ability to issue a General Obligation bond is kind of the special sauce, so to speak, of being a state or a local issuer. I think the reason that you see that particularly in energy efficiency and the renewable energy space is that these are projects that actually have very clear revenue streams associated with the work that is being financed.
So, a government might normally issue a bond to fix a road or to build a road. Unless they are putting a toll on that road, the sort of revenues that result from that are somewhat indirect. Maybe that they're going to have new businesses that are going to be built around the road that will pay taxes. But it's not as clear-cut a case as when you've got an energy efficiency or a renewable project where you can really project out, "Here are the savings that are going to be generated that can be set aside and used to pay back these bonds." So, I think that may be one of the reasons that you see this so much in this space.
Of course, issuing a revenue bond, you're limiting your liability and your obligation, so to speak, to your bond holders. So, that could be attractive when you could do it without having to pay much more interest than you would otherwise. Of course, that's the big distinction is that your bond buyers are going to be looking to, "How sure am I that I'm going to get paid back?" The more sure they are, typically the less interest that they're going to require in order to lend you the money. So, that's the tradeoff when thinking about kind of General Obligation bonds versus other bonds.
So, what kind of governments use these municipal bonds? Well, the fact is pretty much everyone, really. So, as an example, back in 2016, there were over 31,000 different municipal bond issuers with bonds outstanding. About five percent of U.S. bonds issued between 2013 and 2017 were municipal bonds in some form or another. The municipal piece of the U.S. bond market is quite significant and the U.S. bond market is one of the most – one of the largest and most active in the world. So, these have been issued by many governments for many, many years.
As a corollary of that is this idea of the bond rating. So, most governmental issuers have obtained a bond rating for themselves and for particular bonds that they've issued. What this involves is typically a rating agency, such as annuities or S&P or something similar that is looking to – the finances of the issuer, what sort of guarantees or reserves or other items they might have to back their ability to pay any particular bond, what the tax revenues and spending history might be, those sorts of things. Essentially, they're assessing, "How likely is this issuer to repay? How likely is it that they might default?"
So, informally, it seems like many municipal issuers tend to be quite highly rated, certainly more so than smaller corporates and that's another reason why bonds can be a cost-effective and attractive financing option for municipalities. Recently, though, we've seen another kind of bond rating which is instead of rating the credit worthiness or the riskiness of the bond, some rating agencies are offering ratings as to how green the bond is. Sometimes they have a scale from light green to dark green. Of course, greenness may be in the eye of the beholder and each of them has a different methodology and different experts' approaches to doing this. So, we'll talk a little bit more about green bonds in a minute.
So, as I alluded to previously, what a green bond is is still, I think, being decided. It maybe depends on who you ask. There are multiple definitions, taxonomies, standards that are being promulgated currently. These things are not that old. But essentially, the idea is a green bond is something – is a bond where the proceeds are being used to finance something that an investor might consider green. That could be energy efficiency or renewable energy, but it also could be public transportation or clean-air projects, certain waste management, land conservation, water treatment and water conservation projects a well.
So, there's really kind of a broad range of uses that someone might think was a green use. Essentially, labeling a bond green is a way to facilitate investors finding the bond. So, certain investors may be looking for bonds that both have a reasonable risk-adjusted return and meet their financial needs but also that meet their social or sustainable investing goals.
So, to that end, some bonds actually in the name of the bond, when you're looking at Bloomberg Terminal or one of these online listings where you can look up bonds will actually have green in the heading so that when you're searching, you can search by green and find the bonds. So, what does that mean, though? Who gets to decide whether you can put green in your name of your bond issuance? The answer is, right now, you can decide for yourself. You can self-label your bond as green.
Typically, market _____ expect that if you do that that you are at least complying to the other [audio skips out] _____ set of standards that have been promulgated and recently updated actually in 2017 by ICMA, the International Capital Market Association. Those principles really have a lot to do with transparency and disclosure and reporting around what you're planning to use your proceeds for and then what you did use your proceeds for. For a lot of municipal issuers, that kind of disclosure is almost required anyway in order to get the bond approved. This may be one of the reasons that green labeling is in such a big leap for a municipal issuer who's already issuing bonds for energy efficiency and renewable energy.
We do find, still, that most green-labeled bonds are self-labeled, meaning nobody was paid an extra sum to opine. There was not necessarily any kind of third-party verification, meaning there may not have been much additional cost to the issuer. Of course, when you're labeling something as green, you have to be thoughtful about how you're doing it so that you don't open yourself up to claims that you were being misleading or deceptive or there's a term called green-washing for issuances that label themselves as green that certain environmentalists disagree with. So, it's got plusses and minuses in that respect.
So, we've talked about the fact that almost – probably most governments have issued a municipal bond at some point in time, but what about issuing them specifically for energy efficiency and renewable energy as opposed to more traditional say roads and bridges that you might associate with the use of municipal bonds? Well, it turns out that actually most states have issued municipal bonds for green projects as well. So, EPC looked at the issuances that we could find in the various public sources and found municipal bonds for these types of purposes issued in at least 44 states, the District of Columbia, and Guam.
We were looking at a definition that as a big broader than just energy efficiency and renewable energy. But within the group, we found about 30 billion in issuances for energy efficiency and renewable energy just in that time period alone. Interestingly, energy efficiency projects outnumbered the renewable projects by more than 2:1. I think the renewable energy projects often get the most attention and press. It's the new technology and the beautiful images, but energy efficiency is a very important and still the dominant part of the sort of municipal bond market for this type of issuance.
So, looking at that same group of issuances that we were able to pull up from various sources, we were able to identify a number of states that had been particularly heavy issuers of bonds for energy efficiency and renewable energy. You can see from this list that they're really all across the country. Certainly, bigger states probably have an advantage in a listing that's looking at dollars issued just purely out of the population and the number of jurisdictions there. But they're really all across the country, from coast to coast, some Midwest, Northwest, Southeast, South Central. So, wherever you are, bonds can be a good option for these types of projects.
Similarly, just to give you a sense of kind of the utilization of bonds for energy efficiency and renewable energy over time, you can see that there are certain years where issuances were particularly high. But really, this has been a long-standing market. The time period that we looked, there were billions of issuances every year. It's not associated with a particular policy or particularly sort of moment in time. This is a tool that can be useful kind of across the board.
It looks like we're ready for another poll question, Sean.
Sean Williamson: Great. Thank you, Elizabeth. So, one of the things we want to do is get a better sense for where our audience stands, with their familiarity with bond financing before we go on. So, take a quick minute to answer this question.
All right, so it looks like most of the attendees are just getting started. So, hopefully, that introductory material, definition of terms, et cetera was useful. About a third of our attendees are fairly familiar. So, Elizabeth, hopefully that gives you a little bit of context in some of the case studies and things to follow.
Elizabeth Bellis Wolfe: Great. Thanks so much, Sean. Good. So, we've got a few case studies for you to kind of make this all a little bit more concrete and also to give you some examples of projects that seem to have been particularly common for using bonds to finance. So, our first example is coming out of Asheville, North Carolina; an LED streetlight conversion. We chose this one because we've seen quite a number of these over the past ten years and really heard a lot of positive stories from folks who have been through this experience.
Asheville is, I think, a good example. Asheville issued about $1.7 million in General Obligation bonds and used the proceeds to convert their old High-Pressure Sodium, HPS, streetlights to LEDs. They did that over about 18 months. This project resulted in annual savings of about $400,000.00 or 2.3 million kilowatt hours, which meant that the payback period was actually less than five years for the project, which is quite short in terms of bonding where bonds can go out much longer than that, if they need to. Certainly, short in the scheme of energy efficiency projects, which as we all know, sometimes have longer pay back periods.
What's really interesting about what Asheville did is they actually set up a Green Capital Improvement Plan. So, they set aside an account where savings from the projects that were financed through the Capital Improvement Plan could be set aside not only to pay the debt service on the bonds but, as in this instance where the payback is done after five years, but the useful life of those light bulbs is significantly longer, the savings can actually be set aside to help support future projects that might be, perhaps, a little bit less low-hanging fruit or a little bit less clear homeruns than the lighting project might be. So, really forward thinking about leveraging these initial projects to help deeper retrofits down the line. We did include a link down at the bottom of each of these slides so you can find some more information about each issuance.
Second example for you comes out of Oxford, Michigan, the Oxford Area Community School District. This is probably a mid-size school district; 8 schools, 4,600 students in grades K through 12. The reason we wanted to show you this example is because of the use of Energy Performance Contracting and also because schools have been an area where we've seen bonds consistently being used successfully to do these types of projects.
So, this issuance was about $3 million. It was a Limited Tax General Obligation bonds. So, that's one of those kind of in-between flavors I mentioned when we talked about the different options for issuance. Here, the project did include some lighting upgrades but it also included some more extensive measures like new boilers, a new chiller and other general conservation and comfort-related measures. The annual savings, again, pretty significant here. Almost $350,000.00 a year and a fairly short payback period of less than 9 years.
This contract is Performance Contracting, which allowed the issuer to get comfortable that the payback and the savings on these measures would be sufficient to justify the cost and allow them to comfortably pay back the bonds. We do see that used fairly frequently in the context of bond financed energy efficiency projects, because it really aligns the incentives of the folks who are providing the estimates and the scope of work and providing kind of some of the engineering estimates to make sure that they are – when they're selling a municipality on what should be done, that they're really being held to the savings that they're estimating and predicting.
If anything is not working out in terms of how something was installed or a choice that was made, they're sharing equally in the risk or the concern that something doesn't work the way it was expected to. So, that can be particularly comforting in the context of a bond where if you're relying on the savings to be able to pay back the principle and the interest, you really want to be pretty sure that your savings are going to cover it.
Now, these kinds of Performance Contracting arrangements, obviously, that tend to be offered by the larger ESCOs and those are the ones that, perhaps, have the balance sheet and the kind of insurance backing where the guarantee might be more significant. Of course, that can result in the project being perhaps more expensive than it would be if there weren't a guarantee involved. So, there's tradeoffs in all of these things, but we do see that Performance Contracting, over and over again, many municipalities have found that it's been worth the investment.
Finally, our last example for you is a little bit more of an unusual example. I think both the prior examples are very well-trod paths that we've seen in various instances across the country. This was a bit more unusual. It was a statewide ESCO program that Delaware did through a sustainable energy utility. They actually went about aggregating a bunch of energy efficiency projects that various state agencies needed to do and entered into agreements with each of the state agencies for sort of installment payments, had the state agency contract with an improvement energy service company that the SEU had vetted and to helped pull together. Then, all those projects were put together as the backing for one single bond issuance.
So, a much larger issuance here. You're seeing the $70 million issuance. Did receive an excellent AA+ rating. Interestingly, these were bonds that were actually backed solely by these payments that were being received, the installment payments, which were, themselves, backstopped by the guaranteed energy savings agreements from the ESCOs. So, you can see similar to the Performance Contracting idea there.
They were tax exempt but they weren't sort of a debt or liability of the state. So, an interesting structuring approach there. Mostly, the agencies were using these for lighting upgrades, but also building upgrades and some of the typical kinds of work that's being done with energy efficiency.
So, I hope that these examples have brought this down to earth a bit and maybe inspired you all to consider using bonds for some of the projects you're thinking about. If you're in that place, a few questions, considerations to start structuring your thinking around that. There are a few things about issuing bonds that are really very local-specific, specific to your jurisdiction. One of them is what the approval process is for issuing a municipal bond. So, in some places, that might actually require a vote of the tax payers or the constituents. In other places, there might be a city council ordinance or resolution, bond resolution that needs to be passed. So, this is one of the places where you really – the role of an experienced bond counsel who is familiar with local law and requirements is really critical in kind of making the jump from starting to think about it to actually executing it.
A similar piece – and this is not bond specific by any measure – but of course, procurement requirements and procedures. If you're doing a project, you're always thinking about this in terms of your contractor who's going to actually do the work. But in the context of a bond, you also have to think about your advisors. So, do you need to put out an RFP for attorneys or do you have an in-house or prior-approved bond counsel that your jurisdiction works with on these types of things? What about financial advisor or placement agent for actually structuring and selling the bonds? So, that might be a little bit of an addition wrinkle to factor into your timeline if you're going to go the bonding route to finance this type of project.
Then, obviously, you want to think about whether your project might be eligible for tax-exempt financing. So, this is, again, a place where your bond counsel is going to be critical in helping you ensure that what you're doing actually qualifies, because sometimes the plan language meaning of things is interpreted in a technical way that might surprise people in things like understanding how you're investing proceeds while you're waiting to actually pay them out to contractors, making sure you're doing that in a way that doesn't jeopardize tax-exempt status. All those sorts of considerations are where your bond counsel is going to help. If you're talking about improving a school with energy efficiency or putting solar panels on your city hall, you're kind of in a pretty standard box. But if you're doing something that's a little bit less traditional, there's going to be a bit more of an analysis that needs to be done.
Another thing to think about is most jurisdictions are issuing bonds somewhat regularly for various purposes. It might be worth looking at the timing of that and whether it would be possible for you to issue sort of your bonds or your series of bonds for your project together with those other bonds to reduce some of the issuance cost. That might require a little bit of coordination around timeframes, depending on how often you issue, and might require a little bit of additional structure if the maturities or the backing on the various different projects might be a little different. But that can be done and, often, is worth getting into and thinking through.
Obviously, you're going to want to think about your bond rating, both – you've got one already. Most critically, of course, that's because if the rating is too low, you may well not get an affordable rate or you might not be able to sell the bonds, which would be a shame if you've gone to all this effort to get the processes done and approved and procured. Most issuers want to see that their issuance will have an investment-grade rating, if possible, to get competitive rates.
You'll want to consider whether you've got – well, you're going to need a legal opinion from an outside counsel with respect to the tax exemption on the interest on the bonds. So, if you are issuing bonds that you believe to be tax-exempt, bond holders typically want to see an opinion of counsel saying that the interest will be exempt to be sure that they're getting kind of what they're paying for, so to speak, or what they're not asking you to pay for, in the case of lower rates due to tax-exemption. So, in some cases, that might be something that your regular counsel can provide. In other cases, it might be the kind of thing you could work with outside counsel on.
Thinking about the revenues from your project or the savings in the case of an energy efficiency project. How certain are they? When will they come in? Is it the sort of thing that there will be no revenues or no savings for a few years while you're doing the building and then three years later you'll start getting them on an annual basis or are they lumpier? Is the project happening in stages? All those kinds of things impact how you sort of structure the repayment on your bonds to make sure that you're matching when you're going to have the money to repay them. There, of course, you're probably going to be working with your engineer, your energy service company, those types of folks to help you get a sense of what to expect there.
Of course, as referenced earlier, if you are working with a builder or an ESCO, you may be wanting to think about whether they're going to offer any kind of guarantee. If they do, sort of how confident you are in them being able to make good on it and whether that guarantee would be worth it in your particular circumstances. So, lots of questions to start thinking through. But hopefully, not overwhelming. I think the takeaway here is that issuing a bond does require advisors to get it all the way to the finish line, but the plus side of that is that you've got a team helping you get it done. So, this can help you get started and thinking through the details, but you won't be alone in this process.
So, to step back, if you've started thinking through those steps and you're now thinking, "Okay, what would I actually do to get this done," I think most – this is obviously over-simplifying, considerably, anyone who's been involved in a bond understands that there's many sub-steps but essentially, you've identified a project that you want to finance that you don't have the money on hand to pay for. You've identified some advisors to help you with it and your bond counsel, your financial advisor underwriter, placement agent, those types of folks how will help you in structuring the bond and drafting all the documents that have to go along with in order to sell it. You'll work through obtaining necessary local approvals for all of that. Marketing and selling the bonds.
Of course, I probably should have put this on the slide, but selecting your contractors and advisors and engaging them. Using the proceeds to actually finance the project and overseeing the building and making sure that goes according to plan. Finally, compliance post-issuance. You might not realize but once you've issued bonds, particularly if they're tax-exempt bonds, you do have to make sure that you're managing the proceeds in a way that still continues to comply with the requirements so that your issuers continue to benefit from any exemption from interest that they might have gotten on the bonds.
So, I think that leads – that's the end of my summary here. We've got a few questions – a few minutes left here if anybody has questions or thoughts.
Sean Williamson: Great. Thank you very much, Elizabeth. That's some very rich content. Hopefully, folks feel that after seeing that, bond financing is a little bit more accessible. It is definitely complicated, but you bring in the right team and partner with the right entities, it can be a very, very low-cost way to finance energy efficiency and renewable energy goals for your jurisdiction. So, please take this time to think through some questions. Pull up the webinar interface and type them in.
I'm going to jump in with a question for Elizabeth right now. Getting back to this idea of pooling or bundling. Obviously, the transaction cost of issuing bonds is significant and whenever we can increase the size and maybe piggy-back an energy efficiency project onto a larger bond issuance, that would be great to do that. Just how difficult is it to do that and are there any other sort of pitfalls or things to avoid or things for anyone trying to do that?
Elizabeth Bellis Wolfe: Sure. So, absolutely recommend bundling issuances when it's possible. As you kind of alluded to, the biggest reason for that is if you've got to hire all these advisors, the bond counsel, the placement agent, and so forth, frequently it doesn't cost that much more for them to opine on a $30 million issuance than on a $10 million issuance even if it involves breaking it up into a couple of series for different projects that are being financed. So, your sort of transaction cost per dollar financed is typically much lower if you can put together as many projects as you can.
Now, I would say that the complication or the pitfall in that, of course, is getting your timing to line up on all these projects, right, so that you're able to kind of get everyone ready to start work on each of them around the same time and, also, given that all the projects may have different revenue sources underlying them or different savings, different timeframes, you'll need to think through how to split them into kind of series within your bond issuance that properly reflect each project. That can be sold separately in many cases to purchasers who might be interested in different types of investments. Some might only be interested in shorter term series whereas others might be interested in the longer-term type series of bonds for bigger projects. But I can think the takeaway is that when you're able to pull together with whatever bonds you might otherwise be issuing for more traditional purposes, that's a very good thing to do if you can make the timing work in terms of cost effectiveness.
Sean Williamson: Great, thank you. So, one question that occurred to me while seeing the case studies is that the payback was pretty good for both the Asheville and Oxford projects. I was wondering why they weren't revenue bonds. In particular, I'm thinking about ESPCs and the Energy Performance guarantee. That would seem to really lend itself to revenue bonds. Why wasn't that used in that particular case and, more generally, does that happen where Energy Performance guarantees sort of lend themselves to revenue bonding?
Elizabeth Bellis Wolfe: Mm-hmm. Yeah, I mean obviously, we'd have to talk to the advisors on those specific issuances which I can't say I've done to be sure. But one reason why an issuer might still choose to use General Obligation rather than revenue bonds is if they're getting a significant enough price break from the purchasers of the bonds that it's worth it and they might think themselves, "Well, I'm saying I'm pledging my full faith and credit, but between this revenue from this project or the guarantee that I've got from the performance contractor, I know pretty well that I'm never going to have to actually use it. I'm never going to have to go and raise taxes in order to pay for it. So, if it's gets me sort of a lower price, if someone will lend to me for half a percent less than they otherwise would and I can get the approval from my community, then that can be worth it to have a more affordable price."
So, I think, really, it often comes down to that tradeoff of, "How hard is it to get the approval for the General Obligation versus the revenue," and, "How much of a price break does it get you?" I think the sort of roadshow period where the placement agent is going out with the paper and kind of marketing it and giving you feedback based on their experience with investors and your type of bond is how that decision ends up getting made.
Sean Williamson: Mm-hmm. Great. Well, I know we are a little short on time, but in two or three minutes, Elizabeth, if you could address that somewhat controversial question on whether or not green bonds actually come with a premium or worth the premium that may be associated with them, I think that would be useful for the attendees.
Elizabeth Bellis Wolfe: Yeah. This is one of those questions that, depending on who you ask, you get a different answer. A few years back, Barkley's published a report suggesting that there might be as much as what they call five basis points, which is sort of like .05 percent premium for bonds that were green-labeled versus otherwise similar bonds that did not have the green label. There's plenty of stories from issuers anecdotally that labeling their bond green brought in investors that they had never heard of before, that had never been interested in their bonds before. But because it had green, it brought new investors to the table. What follows from that, of course, is if you have more investors interested in your bonds, you might go out thinking you're going to have to pay three percent of five percent interest, but because you have enough takers, maybe you can go back and say, "Hey, I've got two times as many takers as I have bonds to offer. So, how about if we take that price down a half percentage point?" So, they can actually end up getting some what they call tightening of the spread, bid-ask spread as they go through that process of kind of marketing to potential buyers.
So, I think those are the sort of folks that believe that there is – now, on the other hand, there are plenty of investors who will say that they absolutely would never buy – spend more on a bond because it has the green label, that they couldn't do so because it would be against their fiduciary obligations, that the only thing they're allowed to consider is the credit-worthiness of the risk and, green or not, that's not something they're allowed to take into account. So, I think there is a variety of opinions on that and it's hotly debated. There are more and more, though, investors who are making commitments to set aside a certain portion of their funds to be invested in green or social impact or those types of investment. You do hear over and over the complaint that we'd love to buy these things, but there aren't enough of them. So, if that's really the case with more and more buyers demanding something and saying that there's not enough supply, simple economic theory would suggest that that would have impact on pricing.
So, I don't think we have a statistical answer yet that we can really point to with real certainty. It may be a while before we can, but I think there is at least anecdotal evidence that it's certainly worth considering, especially in a municipal context where you're providing a lot of disclosure anyway about what you're using your proceeds for and you sort of have to as municipal issuer in many cases and where it might not be that much more of a jump for you to consider whether that label could have a benefit to you. So, obviously, you'd want to speak to your placement agents and your advisors as you're thinking through that. But I do think it's worth considering. But we aren't suggesting that you should suggest a big difference in the pricing. I think that's probably not likely.
Sean Williamson: Great. Thank you, Elizabeth. So, let's transition towards the conclusion of the webinar here. I primarily want to emphasize, for our attendees, resources available at DOE's State and Local Solution Center. We have a page dedicated to bond financing tools that includes case studies, including a couple of the – it was one of the case studies we heard about today. We have a number of K through 12 case studies, some reports, tools. We have a fantastic ESPC financing decision tree where you can figure out what type of bond financing or financing in general you might use within the context of Energy Savings Performance Contracting as well as a printable update on the recent legislative change impacting QECBs and new CREBs.
So, with that, I'd like to thank our attendees for taking the time today. My contact information as well as Elizabeth's is available here. Please, feel free to follow-up with any questions you might have. I'll also note that the Web link to the slides has been posted here if you want to grab that before we log off. You can access the slides right away. Thanks everyone for attending. Have a good afternoon.
Elizabeth Bellis Wolfe: Thanks so much.
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