Tuesday, January 18

A short guide to the world’s first sustainability re-linked bond

It’s the first of its kind – a bond tied to the ethical goals of a pool of your existing loans to various companies.

Last month, the Bank of China branch in London sold the so-called re-linked $ 300 million banknotes. The three-year coupon is subject to the environmental, social and governance terms of five loans in their second and third years, from companies located in the US, UK, Hong Kong and Singapore, according to the bond documentation.

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The coupon also has a reduction clause, which is unheard of. That means bondholders will lose money if debt-linked borrowers succeed in exceeding their sustainability targets.

“The change in the bond coupon depends on the achievement of the ESG objectives of the underlying loans linked to sustainability,” said Zhou Quan, general director of asset and liability management at the Bank of China, in an interview on Friday.

The structure is another first in a bewildering array of different types of ethical debt for investors, as the sector evolves to serve the trillions of dollars seeking governance, social and environmental assets. Global ESG bond sales are approaching the $ 1 trillion mark this year, nearly double the $ 493 billion for all of 2020, according to data compiled by Bloomberg.

While Europe has led the way, debt linked to sustainability in Asia and the Americas has also taken off. These types of facilities have faced skepticism due to the too soft targets that some companies have set themselves and the lack of transparency in the terms of the loans that lead to fears of greenwashing.

This latest Bank of China structure aims to broaden the spectrum of tools that issuers can use, in addition to green bonds and sustainability-linked bonds, to achieve ESG impact, said Jaclyn Yeap, partner at Allen & Overy, who worked on the deal.

It is unclear if other issuers will go ahead and issue similar deals. Below are more details of the offer:

  • The underlying loans linked to the bank’s sustainability included:
    • Industries including travel, wealth management, commerce, manufacturing, and warehousing
    • ESG targets for greenhouse gas emissions and ESG scores
    • ESG price adjustments of up to five basis points
  • The underlying SLL portfolio, all syndicated and sourced from BOC’s international branches, can be adjusted within the bond period, according to Zhou. At the time the bond was issued, the total loan count was greater than the size of the bond, exceeding $ 500 million, it said.
  • The bond was priced 32 basis points above US Treasuries, or about 43 basis points within initial marketing.
  • Investor demand reached $ 700 million, or 2.3 times the size of the deal, during marketing, according to a person familiar with the matter.
    • More than 90% of the demand came from banking investors in the Asia-Pacific region, followed by EMEA, Zhou said.

© 2021 Bloomberg


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