Corporate green loans make little sense without green lenders
UK supermarket chain J Sainsbury has signed what it has called the first ever corporate green loan. But aside from some positive PR for the firm, it’s hard to see the direct benefits the green label will provide to lenders or borrowers in the loan market.
Sainsbury’s green loan was signed for £200m with a five year tenor. The firm lauded the loan as a first, and linked it to the green bond craze that has been sweeping the capital markets - a dubious move, since the markets are so different.
Corporates keen to establish their green credentials, but requiring less cash than a benchmark bond, could sign loans for environmentally-focused purposes. This means good PR for the firm, and might, possibly, help them catch the attention of green bond investors if their requirements increase in the future.
And if banks start making more 'green loans', they can justify raising more bonds themselves from socially responsible investors. Lloyds, an arranger on the Sainsbury's loan, raised £250m through an environmental, social and governance bond at the beginning of July that attracted investors new to its senior debt.
That bond is not linked to the Sainsbury’s green loan (the proceeds will be used for small scale renewable projects and disadvantaged UK small and medium sized enterprises) but there is no reason, in principle, why a green loan could not match a green bond.
But these small positives do not get over the fundamental difference in the make-up of the market. The bond market includes a wide range of green-only funds, which offer a ready and willing investor base for green bonds, and will sometimes take green paper tighter than conventional bonds. Around 66% of the investors in KfW’s €1.5bn deal last week consider themselves to be green-focused, according to one of the deal’s leads.
None of the major international banks, though, has a mandate to finance green-only deals. Lloyds and Rabobank arranged Sainsbury’s green loan. Both of these banks were also bookrunners on a $4.74bn March loan for Trafigura, a company which in 2009 had to pay a settlement fee to around 30,000 Africans, among other fines and compensation claims, after being accused of dumping toxic waste in the Ivory Coast in 2006.
Trafigura maintained its innocence. While there is no suggestion that Trafigura has committed any wrongdoing since, loans houses are clearly not concerned with associating their names with companies with dubious environmental records. Trafigura’s March 2014 loan counted 53 banks on its deal sheet, according to Dealogic.
So structuring a new 'green loan' for banks to sign will not bring in any lenders that would not have financed a deal anyway. The Sainsbury's deal is a first, but not a game changer while no green lenders exist in the loans market.