First sustainable loan in LatAm shows region's commitment to ESG

Author: John Crabb | Published: 2 Aug 2019
Email a friend

Please enter a maximum of 5 recipients. Use ; to separate more than one email address.

sustainable

The first sustainability-linked loan agreement in Latin America closed this month, reinforcing the region's continued display of commitment to environmental, social and corporate governance (ESG) development.

The $1.1 billion revolving credit agreement from real estate company Fibra Uno is the first in Latin America to use the sustainability-linked loan principles recently released by the Loan Syndications and Trading Association (LSTA), together with the Loan Market Association (LMA) and the Asia-Pacific Loan Market Association (APLMA). The transaction is also the first sustainable deal by a real estate entity in the region.

The move comes hot on the heels of the extended green loan principles, which the three agencies updated in December.

Sources suggest that in the early stages of the lifecycle of these two frameworks there is real interest in Latin America in these types of financings, although this is the first actual loan to use one of them.

"While it has been slow there is interest. Perhaps some of the Latin American borrowers would like to use this opportunity to show their strength in corporate governance and sustainability, and prove they are good actors," said one source close to the issue. 


"It is a positive step for the market"


Tess Virmani, associate general counsel & senior vice president, public policy at LSTA, added that it is going to be interesting to see how this will develop in the institutional markets. "It is a great trend to see that the loan market is embracing these new sustainable products and that there are now loan products to support growing appetite for sustainability," she said. 

"I see it as a positive step for the market.'

See also: First certified agricultural green bond lays seed for global trend

KEY TAKEAWAYS

  • The first sustainably-linked loan agreement in Latin America closed this month;
  • It reinforces the region's continued display of commitment to ESG development;
  • The loan is the first in Latin America to use the 'Sustainability-Linked Loan Principles' recently released by the LSTA, LMA and the APLMA;
  • The principles provide that the interest rate in the loan can go up or down based on targets that are established by the company and an independent monitoring company.

Meeting targets

The sustainability-linked loan principles provide that the interest rate in the loan can go up or down based on targets established by the company, together with an independent monitoring company. In this case the target was the electricity consumed by Fibra Uno, the largest real estate company in Latin America.

"The target is to achieve a reduced interest rate while working to improve the environment at the same time," said Mike Fitzgerald, partner at Paul Hastings who represented BBVA, which acted as sole sustainability agent, joint bookrunner and lead arranger in the deal. "Attached to the credit agreement is a list of environmental objectives, and progress on those targets is independently audited each year. If the targets are met, the interest rate goes down. If not, the rate increases."

The benefit of this is that in Latin America, and also in the US to a great extent, there is a huge interest in climate-related disclosure.


"If the targets are met, the interest rate goes down. If not, the rate increases"


Companies traded on the NYSE, for example, are required to update taskforces with climate-related financial disclosures in order to participate in Carbon Disclosure Project (CDP). As a result, there is a huge emphasis on monitoring carbon-related disclosure for companies that are traded on stock exchanges in the US.

Latin America doesn't have this formal process, so these new principles are a way of policing electricity usage as equated to carbon emissions. Relatively speaking, the less electricity a company uses, the less carbon it is emitting.

"These types of loans are a way of policing carbon emissions for those companies that are not traded in the US, especially in Latin America," said Fitzgerald. "The concept of public reporting of environmental standards, such as CO2 emissions, has not quite caught on for companies with only domestic Latin American listings."

See also: Sustainable finance in Africa is driven by demand

A sustainability-linked loan is a corporate loan that has a pricing component tied to the borrower's achievement of certain predetermined sustainability performance targets. When compared to green loans, they are typically less project finance-orientated. "If only green loans were an option, then it may be harder to see sustainable finance grow in the loan market because not much of the market finances projects. Sustainability-linked loans allow for a broader swathe of the market to participate," said Virmani.

From a borrower's perspective there are multiple advantages. One is external messaging: if a borrower has developed a policy of commitment to sustainability or is starting to factor this in and take account of where it can improve, this type of financing is a great way of communicating that. There is a lot of public value to the borrowers in doing this.

As investors become more focused on ESG generally, these principles can communicate to the lender investor community a very welcome level of commitment.

For some borrowers, abiding to the principles could be a plan they had already set out for themselves, so, this could also be a way to get a slight pricing benefit. "The discount in pricing has not been large in most deals, but it is still an incentive," said Virmani. 

See also: GCC’s first green sukuk signals a changing tide