Green loans grow as firms find business and finance harmony
The syndicated loan market is not renowned as a crucible of financial innovation, but with a new rash of green corporate financings it has left the bond market struggling to catch up. The deals offer borrowers a financial incentive to improve the company’s whole sustainability performance. Silas Brown reports.
As is often the case with the loan market, it took a while to limber up.
When Sainsbury’s, the UK supermarket chain, issued the first green loan in July 2014 few predicted a groundswell of issuance, as there was little sign of any incentive for borrowers or banks to do such deals.
As with a green bond, the £200m raised was to be used for green projects, earning Sainsbury’s and arrangers Lloyds Bank and Rabobank some good publicity. But the other main justification for green bonds — that the issuer can attract new, green-minded investors — is absent.
Syndicated loans are provided by a company’s relationship banks, they are not open to all comers.
What is more, most companies big enough to have a pool of green assets to which to allocate the proceeds of a themed financing do not use loans for funding. They use bonds, and have a standby revolving credit facility (RCF) that may often be undrawn.
Therefore little happened in green loans for another couple of years. Now, they are everywhere.
The surge to prominence of green bonds has made loans bankers — and the treasurers of companies not able to issue green bonds — determined not to be left out.
It turned out that the lack of any investor diversification benefit was not a barrier to companies doing green loans, once the idea joined the zeitgeist.
The belief that inspires the green loan market is in harmonisation — that a company’s financing should be an image of its sustainable business model.
“We saw an increased momentum in corporate financing to enter into green loans,” says Eddy van Rhede van der Kloot, chief financial officer at Corbion, the Dutch food ingredients and bioplastics company, in Amsterdam. “Corbion’s input, production and application is all about sustainability, so it makes logical sense to our stakeholders for the company to look for sustainable financing.” Corbion took out a €300m five year green loan in June 2018, with ABN Amro, ING and Rabobank among the lenders.
Pennon, the UK company that owns South West Water, had a similar motivation for its triplet £30m, £30m and £20m loans in May, which namechecked all the buzzwords: green, environmental, social and governance (ESG), sustainability and impact.
“Sustainability is a key part of Pennon’s strategy and looking after the environment is a core part of Pennon’s operations,” says Susan Davy, CFO of Pennon in Exeter. “We see these green financing arrangements as a natural fit with our operations.”
In part, the green loan market has copied green bonds, with deals based on a defined green use of proceeds, on which the issuer reports. Iberdrola, the Spanish energy
company, has been a leading exponent, most recently with a $400m deal in April to refinance three
To support and guide this activity, in March the Loan Market Association and its Asia Pacific counterpart the APLMA launched Green Loan Principles. They address use of proceeds, processes for green evaluation, management of proceeds and methods of reporting.
“This widely supported initiative marked an important first move towards establishing a framework for green lending across global wholesale markets,” says Clare Dawson, chief executive of the LMA in London.
The US Loan Syndications & Trading Association is set to join the other two trade bodies in producing a global set of principles. This should spark further green loan activity in the US, where bankers say there had been none until April, when Crédit Agricole completed the first two syndicated green loans.
But for many, the more exciting development is that the loan market has gone beyond green bonds with an innovation all its own — deals in which the use of proceeds is not defined. The greenness comes instead from giving the borrower an incentive to improve its sustainability across the whole company. If it hits targets, the margin falls; if it performs badly, it rises.
The first two deals came in the same week in April 2017. Unibail-Rodamco, the French-Dutch property company, signed a €650m RCF led by Lloyds, and Philips, the Dutch health technology group, a €1bn loan via ING.
“The two green loan products are very different,” says Leonie Schreve, head of sustainable finance at ING in Amsterdam. Use of proceeds-based deals are “linked to pure green investment and product development — it’s more for companies dedicated to renewable energy or waste management.”
The variable margin loans are “about how on a corporate level you are implementing a sustainability agenda. If you are in a sector where the green nature of products is not that obvious you still have a transition agenda. It enables different types of companies to show what sustainability agendas they are working on.”
Those first transactions started two strands. Philips’ margin depends on whether its external ESG rating from Sustainalytics improves or worsens.
Unibail’s margin will either be 10%-15% tighter than an agreed market baseline, or wider by an equal percentage, depending on three key performance indicators (KPIs) that Unibail’s own management had already set for the business — energy intensity, CO2 emissions and green certification of its properties.
“Companies have sustainable programmes and it’s natural to make a link between that and their finance. If you are socially aware, using KPIs with links to pricing is a good way of proving you really mean it,” says Jeremy Perl, executive director of debt capital capital markets at Rabobank in London.
Corbion’s loan, designed with Rabobank, used KPIs from its corporate strategy, Creating Sustainable Growth. Pennon has a multi-faceted Sustainable Financing Framework, which permits issuance of many debt instruments using formats based on use of proceeds, internal KPIs or ratings.
It is the KPI and ratings-linked structures that have really caught on, as they solve several problems.
Companies do not need a certain volume of specifically green assets; they can use the money for whatever they want — or nothing (in an undrawn facility); they can use existing sustainability metrics and not have to create new ones; and there is a bona fide pricing benefit.
“We got positive feedback not only from our European shareholders but also ones from the US, which is very nice,” says van Rhede at Corbion.
Companies as big as Iberdrola and insurers Generali and Mapfre have used them for their main facilities, as have smaller firms like Tradebe, the Spanish hazardous waste manager, and Grupo Siro, a Spanish cereals maker.
“The loan market can be so much bigger an opportunity than the bond market because we can reach out to parties that have no access to bonds,” says Schreve.
Demand from both sides
The market seems certain to keep growing, perhaps even outstripping green bonds. “For the bank, it is a way to support companies in making sustainability improvements,” says Davy at Pennon. “Some banks have allocated funds for investing in green financing — they recognise this is an expanding area with increasing interest from investors and issuers. There is a growing recognition from financial markets that there is a correlation between businesses focusing on ESG credentials and overall financial sustainability.”
What is not yet clear is how competitive dynamics will develop. When loans are being negotiated, do the banks push for tougher KPIs, the issuers for softer ones? Will banks compete to offer deeper price benefits — or softer ESG targets?
For the time being, the market feels very consensual. But Perl argues the banks are insisting on good standards. “You have to tailor KPI criteria in a way that really stretches the issuer,” he says. It needs to bite, otherwise there’s no point.”
Schuldschein’s split personality
Germany’s Schuldschein private debt instrument is often described as offering the best of both loans and bonds. However, this split personality may create a difficulty, when it comes to green financing.
Since the first accredited green Schuldschein deal by wind turbine maker Nordex in March 2016 there has been a steady trickle of green issues.
Nordex’s €550m three, five, seven and 10 year offering was more than doubled during sale, to satisfy strong demand from lenders. Dutch dairy firm FrieslandCampina completed a €300m deal, which grew by a third in syndication.
Since then, half a dozen more have come, including Volkswagen, Dutch grid company TenneT, Spanish renewables firm Acciona and filter maker Mann+Hummel.
But it is not clear how much the investors care that the deals are green. This pool of deals is so far not large enough to have attracted many specifically green funds, which would enable green Schuldscheine to offer issuers the same investor diversity and marginal pricing benefits as green bonds.
“At the moment there is no direct pricing advantage for green Schuldscheine, but that may change over time,” says Bettina Streiter, head of corporate origination at DZ Bank. “It all boils down to what kind of investors are looking for green formats and if there is specific green demand. Certain banks with certain sustainable projects like the development banks in Germany may, in the future, need to fill sustainable finance buckets with green investments.”
On the other hand, the Schuldschein market has not — so far — operated like green loans and given an agreed margin variation, because investors are not relationship-driven.
Streiter believes that to lure green funds in, and thus create a true incentive for borrowers, the product needs to be more bespoke.
“We’ll have to see growing sophistication in the green product over time, more than simply green accreditation,” she says. “How green is the financing? Is it really sustainable? These are the questions that will draw more investors in.”