Just in time for St. Patrick's Day, Alexandria Real Estate Equities (BBB+, stable) issued several green bonds. According to the International Capital Markets Association, "Green bonds enable capital-raising and investment for new and existing projects with environmental benefits." To be considered a green bond, the issuer commits to using the proceeds from the bond issue for projects that will enhance its climate or environmental profile. Currently, there are no governmental regulations that stipulate what a company must do to designate an issue as a green bond, but the ICMA has published Green Bond Principles 2018, which outlines its voluntary process guidelines. Typically, the issuer will solicit a second-party opinion to provide investors with its assessment of the company's adherence to the ICMA's four core components of the Green Bond Principles.
The note offering consisted of $200 million 5-year notes, $350 million 7-year bonds, and $300 million 30-year bonds (the 30-year bonds were not designated green bonds). There was significant demand for the offering, which was reportedly 7 times oversubscribed (meaning that there was $6 billion of orders for the $850 million offering). This is about double the average oversubscription level in 2018. Due to the high demand, the bonds were priced at spreads 25-28 basis points tighter than the original whisper talk in the market. The bonds were priced at spreads of +105, +132, and +187, respectively. Typically, new issue bonds are sold at a slight discount to where the firm's existing bonds are trading in order to develop investor interest; however, in this case, according to Bloomberg, the new green bonds were priced at spreads tighter than where existing bonds were trading, leading to a negative new issue concession of 8-10 basis points.
Alexandria's green bond issue follows a $1 billion 10-year green bond issued by Verizon Communications (BBB, stable) in mid-February. Similar to the demand for Alexandria's green bond, demand for Verizon's new notes was off the charts, as Bloomberg reported that the note offering was 8 times oversubscribed. One bond trader said he thought that Verizon's bonds were priced about 5 basis points tighter than an equivalent non-green bond would have priced for the same maturity. In the case of this bond issuance from Verizon, a second-party opinion was provided by Sustainalytics, a leading independent provider of environmental, social, and corporate governance research, ratings, and analytics.
The global market for green bonds has been growing rapidly, with European markets leading the way. While the United States may be lagging, its market's demand for green bonds has been steadily growing in conjunction with investors' appetite to invest in companies that focus on improving environmental, sustainable, and governance risk factors in their business. As investor demand for ESG-dedicated funds grows and issuers recognize the benefits to their corporate image as well as some potential cost savings on their interest expense, we expect that the green bond market will grow significantly in the U.S. Other examples of companies that have issued green bonds denominated in U.S. dollars are Apple (AA-, negative), Boston Properties (A-, stable), and Kilroy Realty (BBB, stable).
Corporate Bond Market Update
The corporate bond market rebounded last week and recovered most of the credit spread widening that had occurred the prior week. The average spread of the Morningstar Corporate Bond Index (our proxy for the investment-grade corporate bond market) tightened 3 basis points for the week to +124. In the high-yield market, the average spread of the ICE BofAML High Yield Master II Index tightened 23 basis points to +395. Year to date, the investment-grade and high-yield markets have recovered a significant amount of the widening that occurred late last year as the equity markets were dropping. Thus far this year, investment-grade corporate bond spreads have narrowed by 33 basis points, and high-yield spreads have tightened 138 basis points. Fixed-income indexes have performed well this year as credit spreads have tightened and interest rates have declined. Through March 15, the Morningstar Corporate Bond Index has risen 3.50%, and the ICE BofAML High Yield Master II Index has risen 6.68%.
Recent Morningstar Credit Ratings Research
Following the announcement that the U.S. Federal Aviation Administration grounded all of Boeing's (A, stable) 737 MAX aircraft operated by U.S. airlines or flown in the U.S., Morningstar Credit Ratings, LLC noted that the action does not affect our credit rating on Boeing.
In our report, we noted that while only around 350 MAXs are operating globally, the aircraft represents the bulk of Boeing's massive backlog. At the end of February, Boeing reported 5,904 aircraft in its backlog, of which 4,636 are 737 MAXs; only 87 were the old version 737NG. Customers will not be able to easily walk away from their order, as Airbus has a similarly large backlog of its competing A320 line and an order placed today for that aircraft might not be filled for several years. In our view, once the safety of the aircraft has been ascertained, Boeing and its customers will come to an agreement on appropriate adjustments to their original agreements. While the ultimate financial impacts from the events are unknown and may be substantial, we forecast that Boeing will generate substantial free cash flow over our five-year forecast horizon and should have plenty of liquidity to operate and cover the cost of any required repairs or recalls.
Weekly High-Yield Fund Flows
Net unit creation for high-yield exchange-traded funds accounted for all of the $0.9 billion of fund inflows into the high-yield sector last week. In fact, for the fifth week in a row, almost all of the fund flows across high-yield mutual funds have occurred among ETFs as fund flows among open-end funds have been essentially unchanged. Year to date, total inflows into the high-yield asset class is $9.5 billion, consisting of $5.3 billion worth of net unit creation among high-yield ETFs and $4.2 billion of inflows across high-yield open-end mutual funds. However, over the past 52 weeks, fund flows in the high-yield asset class remain decidedly negative. Across both ETFs and open-end funds, total outflows over the past year are $8.9 billion. Yet the outflows are entirely due to $9.1 billion of redemptions among open-end funds, as net unit creation among high-yield exchange traded funds was slightly positive at $0.2 billion.
Morningstar Credit Ratings, LLC is a credit rating agency registered with the Securities and Exchange Commission as a nationally recognized statistical rating organization ("NRSRO"). Under its NRSRO registration, Morningstar Credit Ratings issues credit ratings on financial institutions (e.g., banks), corporate issuers, and asset-backed securities. While Morningstar Credit Ratings issues credit ratings on insurance companies, those ratings are not issued under its NRSRO registration. All Morningstar credit ratings and related analysis contained herein are solely statements of opinion and not statements of fact or recommendations to purchase, hold, or sell any securities or make any other investment decisions. Morningstar credit ratings and related analysis should not be considered without an understanding and review of our methodologies, disclaimers, disclosures, and other important information found at https://ratingagency.morningstar.com.