Real estate investment trust Starwood Property Trust priced a US$300m debut sustainability bond in the high-yield market on Monday that looked to appeal to a growing audience for ESG bonds.
The REIT looked to highlight investments the company has already made in affordable housing, energy-efficient commercial real estate, and infrastructure projects such as wind and solar farms.
It was also designed to tap into the growing pockets of capital in the fixed income market for ESG investments.
The net proceeds of the bond offering will be "allocated" to these projects and a reporting requirement in the offering prospectus will keep investors appraised of how and where the allocations are made.
But as the company has already invested in the projects, the immediate use of the cash proceeds will be for refinancing debt.
The company said that US$250m of the proceeds will be used to pay down its 3.625% senior notes due 2021.
A report from S&P said it expected the remaining proceeds to pay down its secured repurchase facilities.
There is a split among ESG-focused investors on whether or not this backward-looking approach - financing projects already completed rather than new developments - is appropriate.
Steve Liberatore, a portfolio manager of the TIAA-CREF Core Impact Bond Fund, said he participated in the Starwood bond offering because there was strong transparency over the use of proceeds and the subsequent reporting the company will offer investors on the impact of these projects.
"Ultimately, what we want to do is help lower the cost of capital for green, sustainable and social projects, to make them more competitive and cheaper in the long run," he said.
"We are bringing down the cost of that project down so to the issuer it is more attractive in the future to focus on renewable projects."
The deal fit into his portfolio's impact framework, which is focused on transparency and disclosure, he said.
It is down to investors to decide if a deal meets their definition of what is considered a "sustainable" bond, a capital markets lawyer said.
"There's no legal requirement," she said. "ESG is still a developing field and there are general principles and frameworks that no one is (legally) required to follow."
The Starwood offering was aligned with ICMA green bond principles, Liberatore said.
The US$300m three-year bullet senior unsecured notes priced at 5.50%, at the tight end of 5.50%-5.75% price talk. The bonds carry Ba3/B+ ratings.
The company has an outstanding 4.75% 2025 note that was trading at a cash price around 98 to yield 5.30% on Tuesday, according to MarketAxess.
As it is an unsecured bond, it would not be expected to price lower than the general unsecured obligations of the company, according to Liberatore.
But the deal does open new pockets of capital for the company.
"It gives them a more diverse pool of capital as an issuer. And it allows you to speak to all of your stakeholders on how you are adapting or addressing climate change as an organization," he said.
"We probably wouldn't have looked at it if it wasn't impactful."
JP Morgan was the sustainability structuring agent to the issuer. The bank declined to comment on the deal.
Joint bookrunners alongside JP Morgan were Barclays, Bank of America, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley and Wells Fargo.