Bonds & Loans: Investors fear issuers will use sustainability-linked bonds to ‘game the greenium’

A weekly overview of ESG developments for fixed income

The European Leveraged Finance Association has become the latest body to raise concerns over the use of sustainability-linked bonds with ‘step-ups’. A survey of European credit investors by the association highlights fear about issuers’ ability to ‘game’ greeniums by issuing high-yield sustainability-linked bonds that are callable before the penalties kick in for not meeting ESG targets – taking advantage of the greenium while reducing the risk of a coupon step up. Half of investors surveyed said the cost of calling the bond should be 50% plus the coupon step-up if the non-call period ends before KPIs are to be tested. Last month, the European Banking Authority raised similar concerns in a report. 

Sustainability-linked loans issued by the European healthcare sector reached €6.3bn in May, according to S&P, with an increasing number of loans linked to social targets such as patient satisfaction and access to care. However, S&P said that many KPIs are specific to individual entities, limiting comparability.

Thailand’s Precious Shipping has secured an $85m sustainability-linked loan from a consortium including the IFC and the Export-Import Bank of Thailand. The loan, which will finance cement and bulk carriers, is linked to the firm reducing onshore-sourced freshwater usage on its vessels.

Enel subsidiary E-Distribuzione has signed a €600m sustainability-linked loan with the European Investment Bank to fund grid modernisation and resilience. The loan’s interest rate is linked to E-Distribuzione’s target of generating 148 grams of CO2 per kilowatt hour by 2023.

Property firm Bruntwood has signed a £276m 15-year sustainability-linked loan with Aviva Investors, consolidating most of the firm’s existing long-term credit facilities. The deal is linked to sustainability targets including carbon reduction and green energy use.

Columbian telecommunications firm Movistar has signed a three-year COP200bn (€45m) sustainability-linked loan with Colpatria, tied to energy efficiency and training targets.

Aldar Properties claims to be the first MENA real estate firm to take out a sustainability-linked loan, after signing a Dh300m (€28m) deal with HSBC. The interest rate on the five-year deal will be adjusted annually based on Aldar’s progress on energy and water intensity, waste recycling and worker welfare targets.

Salmon farming giant Mowi has agreed a five-year, €1.8bn sustainability-linked revolving credit facility with a consortium of European banks including Danske Bank and SEB. The facility is linked to the firm’s performance against targets in its ‘Leading the Blue Revolution’ plan.

Sovereign bonds have been in the spotlight this week, with two LatAM deals to raise money for social and sustainability projects, as well as plans for an offering in Ghana. Chile raised CLP1.5tn (€1.7bn) from a social bond to finance the covid recovery, household support, education and essential health services. The seven-year deal, which priced at 4.6%, was 1.8 times oversubscribed and nearly half the notes went to international investors. 

Meanwhile, Mexico raised €1.25bn from its second SDG bond. The 15-year offering was 2.6 times oversubscribed and has a coupon of 2.25%, which the Ministry of Finance said was its lowest coupon ever for a 15-year bond in the euro market. Proceeds will be allocated to programmes that contribute to the Sustainable Development Goals in the country. Ghana is now planning to sell up to $2bn in green and social bonds by November, and is working with the IFC on a framework. Proceeds will fund improved access to healthcare and free access to education.

French insurer Groupama has raised €500m from its inaugural green bond issuance. The seven-year bond, which will fund green buildings, renewables and biodiversity efforts, priced with a coupon of 0.75% from an orderbook of €850m.

SME Bank has raised RM3bn (€610m) from a sustainability sukuk – the first from a Malaysian Development Finance Institute. Proceeds will finance loans to SMEs operating in areas including hydropower, affordable basic infrastructure and access to healthcare.

Reykjavik University plans to raise social-labelled debt, reviewed by S&P, to fund investments in university facilities and student apartments.

Norwegian energy group Bonheur has issued a NOK700m (€68.5m), five year green bond with a coupon of 2.9% above the 3-month NIBOR. It will finance eligible projects including vessels for offshore wind turbine transportation and installation and other investments in renewable energy projects.

UK Charity Golden Lane Housing has raised £11m in social bonds to refinance a loan from RCB, and for the adaptation of housing for people with learning disabilities. The ten-year 3.25% bonds were issued through the special purpose issuer Retail Charity Bonds.

UK local authorities should consider issuing green bonds to fund low-carbon projects such as electric vehicle infrastructure, a report by think-tank the Social Market Foundation has said. The report says that local authorities should be granted greater powers and flexibility to raise capital for low-carbon projects, pointing to the example of Sweden, where municipal green bonds make up 10% of the SEK bond market. The UK’s first local authority bond was issued by West Berkshire Council last year to fund solar panels on council properties.

Hongkong Land has raised $500m from a 10-year green bond issuance. The firm’s inaugural green bond was three times oversubscribed by a mix of Asian and European institutional investors, and priced with a coupon of 2.25%. Proceeds will be spent on projects including green buildings and sustainable water management.

Benelux waste-to-product firm Renwi has raised €125m from a green bond offering. The six-year bonds have a coupon of 3% and are available to retail and institutional investors. Proceeds will be partially spent on refinancing existing debt, as well projects in the circular economy and pollution prevention and control categories.

Egypt’s Commercial International Bank has agreed a $100m private placement with the IFC for a five-year green bond to fund a portfolio of green loans to corporate and SME clients, with up to 20% being spent on the bank’s own green buildings.