Photo of Paul Foster, Toyota Financial Services, collecting the Award on behalf of Adam Stam.

The TFS Green Bond was the first of its kind in the automotive industry and served to enhance Toyota’s reputation for leadership of green innovation. Because no other automotive finance company had previously issued a green bond, TFS needed to independently develop a transaction structure and environmental standards for the eligible vehicles to ensure that the deal would appeal both to traditional buyers of Toyota asset-backed securities and ‘green-motivated’ investors.

The challenge

In recent years, demand for green bonds has grown, as more portfolio managers have expressed a preference for investments that meet both their return objectives and address the problems of climate change and sustainability. However, the supply was limited, as green offerings were largely limited to bonds from sovereign, super-national and agency (“SSA”) issuers. The TFS Green Bond addressed this latent demand for corporate green bonds by targeting both frequent ABS investors and SRI portfolio managers who had not previously purchased ABS bonds.

“The programme was designed to diversify TFS’ investor base, highlight Toyota’s market-leading line-up of green vehicles and extend the company’s environmental commitment to our capital markets activities,” explains Adam Stam, Manager, Structured Finance.

The solution

A “Green Bond” is a debt offering for which the issuer declares that the proceeds will be used towards environmental sustainability purposes. These may include the purchasing of plant and equipment and also financing environmental projects, or other “green” initiatives, like green vehicles.

The proceeds of the TFS Green Bond are being used exclusively to fund new retail finance contracts and lease contracts for green vehicles. To be eligible for financing the vehicles must meet specific criteria, including using a gas-electric hybrid or alternative fuel powertrain; recording a minimum EPA estimated MPG (or MPG equivalent for alternative fuel vehicles) of 35 city/35 highway; and obtaining a California Low-Emission Vehicle II (LEV II) certification of super ultra-low emission vehicles (SULEVs) or higher, which would include partial zero-emissions vehicles (PZEVs) and zero-emissions vehicles (ZEVs).

Initially, TFS considered creating a transaction in which the underlying securitised receivables would consist exclusively of green vehicles. “However, we ultimately decided to securitise a representative mix of the entire Toyota, Lexus and Scion model line. In other words, the green vehicle criteria were applied only to the use of proceeds, not to the securitised assets,” explains Stam.

This consistency in collateral with prior Toyota ABS transactions was critical to retaining their established investor base. At the same time, using a pool of standard automobile loans to grow TFS’s investment in ‘green’ assets appealed to environmentally-minded investors. These self-identified green investors accounted for 15% of the orders in the transaction.

TFS will produce monthly reports until the proceeds have been used in their entirety. These will highlight the amount of green vehicles financed by each model type, as well as the amount of remaining unused proceeds. This gives investors certainty that TFS is using their investments to finance green vehicles as promised.

Best practice and innovation

The TFS Green Bond was the first of its kind in the automotive industry and served to enhance Toyota’s reputation for leadership of green innovation. Because no other automotive finance company had previously issued a green bond, TFS needed to independently develop a transaction structure and environmental standards for the eligible vehicles to ensure that the deal would appeal both to traditional buyers of Toyota asset-backed securities and ‘green-motivated’ investors.

During the project the TFS Capital Markets team collaborated closely with the marketing and environmental communications departments at their US affiliate, Toyota Motor Sales, to develop standards which reinforced Toyota’s overall environmental communication and product messages in North America.

“Over the long run, investor diversification helps TFS to maintain pricing tension when we bring new deals to market,” concludes Stam.