One of the hottest trends in finance is prepaid muni bonds structured to help local utilities buy decades worth of renewable electricity. They’re good for the environment, but even better for the banks that will profit from cheap financing, trading profits and federal tax breaks.marketed under the moniker “ESG” , is a huge and growing business. In 2015 global ESG-related assets were $2.2 trillion, according to PwC, growing to $9.4 trillion in 2020 and nearly doubling in 2021 to $18.4 trillion.
Scorekeeper Monica Reid started Kestrel Verifiers in 2020 to certify ESG bonds and fight greenwashing. Next year her company will launch a subscription service rating almost all 12,000 muni bonds issued annually on do-gooder criteria.There are many winners. The banks get cheap loans to spend on whatever they want. Californians, like the residents of 15 other states and the District of Columbia, get to pick their provider and can choose to put their money toward greener power.
In the last 14 months, CCCFA has issued $2.7 billion in three different Clean Energy Project Revenue Bond deals, with tax-exempt coupon rates of 4%, courtesy of Morgan Stanley and Goldman Sachs. The money goes toward prepaying for 30 years of renewable electricity. Prepaying comes with a discount. CCCFA members, for example, expect to save $7 million per year on their electricity purchases.
Enron’s bankruptcy in December 2001 was a setback for prepaid gas deals. The Houston energy firm had fraudulently boosted its cash flow by entering into numerous prepaid commodity swaps with banks like JP-Morgan and Citibank. In these circular deals, Enron would get billions in upfront payments from the banks in return for promising to repay the funds with gas deliveries.
Here’s how a recent Black Belt Energy bond deal worked. In October, Goldman Sachs and Stifel issued $383 million in 5.5% tax-exempt bonds, which were eagerly snapped up by fund managers including Vanguard, BlackRock and TIAA-CREF. After accounting for debt service reserve and other costs including 1% in issuance fees, some $377 million was handed over to a limited liability company called Aron Energy Prepay 13 LLC. That LLC was set up by Goldman Sachs’ commodity trading subsidiary, J.
“When you can buy a high-quality intermediate investment and pick up as much spread as you do in this sector, it’s a good place to be,” says one mutual fund manager.