Sustainability a far cry from the fusty world of US PPs
Several chances to demonstrate commitment to corporate sustainability have occurred in the US private placement market recently, and the market has fallen short in almost every case. Most of the PP market is as unfamiliar with using the term 'ESG' as it is to yelling 'YOLO'.
In the past week, Sydney Airport has issued the first US private placement to have sustainability-linked pricing, meaning that the interest can be changed if the issuer hits sustainability targets.
Then on Monday, Britvic, the UK soft drinks group, closed a £400m sustainability-linked loan. It pledged to give any money it receives from a reduction in its margin to charity.
Sarah Webster, sustainability director at Britvic, said: “This financing agreement is part of our commitment to embed sustainability at the heart of our business and drive real behaviour change.”
What the owner of Robinson’s, J2O and Purdey’s drinks did not announce was that it had also issued a £150m US private placement last week — but this had no sustainability-linked component.
This could be for a variety of reasons.
Corporate US PPs are mostly issued at maturities from seven to 12 years, or longer. Constructing sensible key performance indicators to track a company's sustainability performance over that kind of horizon is trickier than for a typical five year corporate loan.
One source said it was harder operationally to alter a fixed interest rate on a PP than the margin on a floating rate loan.
But the bigger reason why Britvic did not make its PP sustainability-linked is more likely that most US PP investors, especially those based in the US, simply don't care.
Unlike a syndicated bank loan, a US PP is not relationship-driven. It is a deal between a borrower and serious institutional investors, who care about getting paid for taking credit risk. They have no ancillary business to look forward to from the relationship, and therefore no reason to indulge the borrower's wish to engage in a sustainable financing. In fact, some regard such whims as transgressing their fiduciary duty.
Moreover, there are no dedicated ESG funds that regularly participate in US PP deals.
One PP investor from a UK institution said: “ESG is very much the hot topic but I’m less clear of the merits of particular tranches of debt being green or sustainable. We're interested in what makes for a sensible investment."
There have been some green US PPs, notably from Tideway, the company building the super sewer under the River Thames in London. In March 2018 Thames Water also brought a £705.1m issue and the City of London’s £450m deal in July 2019 was also issued under a Green and Sustainable Financing Framework.
Now Sydney Airport has issued the first US PP with pricing linked to sustainability, though this was only one tranche of the deal.
But these are rare occurrences. Considering that many PP borrowers, like Britvic and Sydney Airport, have issued green or sustainable loans, the scarcity of sustainability-linked PPs is likely to be due to institutional investors being unwilling to give up some of their return to reward the borrower for good performance.
Nevertheless, at this year’s PP industry conference in Miami in January, sustainability was the front and centre topic. Panellists competed to out-ESG each other, in a spectacle of virtue signalling more typical of a university classroom.
The meetings behind closed doors were different. According to a senior PP banker, when he met some investors at the conference, they “laughed off” sustainability and ESG as mere conversation topics.
According to a source familiar with the PP deal, Britvic showed several slides on its sustainability strategy at its roadshow meetings, but PP investors did not ask questions about it.
One reason why this may have taken a while to filter through is that insurance companies, which constitute the backbone of the PP investor base, do not have any obvious stakeholder group pressuring them to be greener. They are different in that sense from asset managers, which now routinely have to set out their ESG credentials when pitching for mandates to pension funds.
But whereas retail customers increasingly care whether their savings are invested sustainably, few dream of thinking about whether their insurance company invests their premiums for the good of society.
Ultimately, the PP market will have to get with the programme. The shift of the investment industry towards sustainability is going to sweep through the PP world. The conference sessions in Miami are a sign of that. Most market participants now know what ESG means, even if it still makes little difference to how they act in practice.
But it is fair to say that the US PP market is likely to be playing catch-up for some time.