General Motors said Thursday it has launched an offering of senior unsecured fixed rate notes and it will use money from the sale of the notes to “finance or refinance” green projects such as electric vehicles.
Basically, that means GM will be taking out a loan to pay off debt it already owes on any projects in its Sustainable Finance Framework.
Any money left over will fund new projects in the framework.
GM’s Sustainable Finance Framework includes its zero-emission vehicles, battery technology, battery storage and battery management systems, fuel cell technology, charging infrastructure and other green initiatives such as making EVs and self-driving taxis accessible to all income levels and communities.
“This is a Green Bond with a fixed interest rate, which is still being negotiated with the borrow and end lenders,” said Erik Gordon, business professor at Ross School of Business at University of Michigan. “They can use the money to finance any of those types of green projects going forward or any of the green projects they’ve spent money on the last 24 months.”
Gordon studied the preliminary prospectus that GM filed Thursday morning on the offering with the SEC. The filing did not indicate how much money GM looks to raise or other details. GM spokesman Jim Cain said he was “not able to comment” on the filing at this time.
But by evening, GM issued a press statement saying it was announcing the pricing of two series of senior unsecured fixed rate notes for a total of $2.25 billion. The notes include $1 billion of 5.40% notes due in 2029 and $1.25 billion of 5.60% notes due in 2032. The offering is expected to settle on August 2.
This is the second time this week that GM has teed up future loans. On Monday, the Department of Energy announced “a conditional commitment” for $2.5 billion to GM’s and LG Energy Solution’s 50-50 joint venture called Ultium Cells LLC. The U.S. government loan would go to build battery cell plants for EVs, including one going up in Lansing.
“Assuming the loan is approved, it would have the effect of lowering the amount of capital the joint venture partners would need to fund directly,” Cain said at the time. “Ultium Cells will repay the loans with proceeds earned by selling its cells to GM.”
Gordon said companies typically do these kinds of offerings for the same reasons people refinance their home mortgage: To get a lower interest rate when they can.
“They’re on the lookout to see if they can lower their borrowing costs,” Gordon said. “This is standard procedure. The timing is probably pushed by fear of rising rates. If they do this in six months, they will probably pay more for the new loan than they do today.”
On Wednesday, the Federal Reserve issued a 75-basis-point rate hike the second this year. It means the rate that banks charge each other for overnight borrowing is now 2.25% to 2.50%, the highest since December 2018, according to CNN Business.
In GM’s earnings call with analysts Tuesday, CFO Paul Jacobson alluded to GM’s refinancing plan saying GM is, “finalizing the deals of GM’s Sustainable Finance Framework, which will unlock options to help us align our balance sheet with our ESG (Environmental, Social and Governance) strategy.”
GM’s ESG strategy consists of its promise to be a carbon neutral company by 2040 and develop socially responsible programs to assure everyone has access to clean transportation. In May, GM asked its suppliers to sign a pledge committing to the same goals.
GM has not disclosed how much money it looks to borrow to pay down debt because those terms are still being negotiated between the borrower and the lenders, Gordon said.
“They haven’t decided on the amount,” Gordon said. “This is a preliminary prospectus … it leaves out the amount, the interest rate and due date.”
As for the “Green Bond,” Gordon said, those started in the last few years as an “outgrowth of the ESG movement.”
To support the green movement or environmentally friendly initiatives, Green Bonds usually have two interest rates, Gordon said.
“The one you pay depends upon if you hit the green goals agreed upon by the company and lenders in advance and it is measured,” Gordon said. “In any period that you hit the green goals, you pay the lower interest rate. If you miss, you pay the higher interest rate. Green Bonds go beyond the CEO making a grandiose announcement, it actually measures performance and the performance has dollar-and-cents consequences. Cool idea.”
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Contact Jamie L. LaReau: 313-222-2149 or jlareau@freepress.com. Follow her on Twitter @jlareauan. Read more on General Motors and sign up for our autos newsletter. Become a subscriber.