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The recent Russian invasion of Ukraine highlights a new challenge for investors concerned with ESG issues. We’ve seen multiple high yield companies distance themselves from Putin’s regime, whilst some investors have pulled out of investments in the area.

Some commentators have mocked ‘ESG’ in recent weeks, accusing sustainable funds, which hold interests in Russian energy giants Gazprom and Rosneft, and lender Sberbank, of being partly to blame for the funding of the war. Meanwhile, former Ukrainian finance minister, Natalie Jaresko, has called for self-proclaimed ESG companies to ‘walk the walk’.

We have seen a flurry of HY names halt operations in Russia over the past couple of weeks, including Maersk, Solvay, Gestamp, Netflix, and AECOM, arguably demonstrating their willingness to sacrifice top line growth in order to enact morally responsible policies. Other companies have refused to cut ties, but does this mean they aren’t socially responsible? Stada, for example, has continued to operate in Russia, where two of its manufacturing facilities are located.

Lobbyists are using what they see as a window of opportunity to push the debate on whether weapons should be classified as a ‘social’ asset in the EU taxonomy. Several defence lobby groups argued that there was no sustainability without a defence and security industry. If they’re successful, this may grant defence companies more favourable access to financing. We recently reviewed German military spending in HY markets after the country announced a forward commitment to spending 2% of GDP on defence. If you are not a client but would like to request a copy of this report, please complete your details here. 

The EU Taxonomy also came under increased pressure earlier in the month over the controversial labelling of gas and nuclear energy as ‘green’, despite objections from investors, member states and its own expert group. Commentators have suggested this provides a ‘gift’ to President Putin, and have described the worrying correlation between Russia’s oil and gas exports to Europe and Russian military spending.

JPMorgan announced plans to remove Russian bonds from indices focused on environmental, social and governance issues. The removal could lead passive funds that track the indexes to sell their holdings.

Recent research from the University of Zurich, titled ‘Who Pays for Sustainability? An Analysis of Sustainability-Linked Bonds’ suggests that companies may have found a ‘free lunch’ when issuing SLBs. The research found that, on average, the penalty for not achieving KPIs was around 25 bps. Meanwhile, the research team found that issuance itself was often issued at a premium of close to 30 bps compared to the issuer’s similar unlabelled bonds. The research estimated that about two-thirds of issuers received a ‘free lunch’ where the premium on the SLB exceeded the potential future cost if the targets were not reached.

This study looked at both high yield and investment grade bonds.

Generally we haven’t found evidence to suggest there is a ‘greenium’ in SLB issuance. The KPIs themselves may be unambitious in many cases, reducing the likelihood of missing the KPIs and suffering a coupon step-up, which makes this possibility less valuable to investors. Similarly, the risk of an issuer seeing their financing costs increase through the coupon step-up is low, and even if it was paid, the amount would be minimal.

Stronger structures which incorporate more ambitious targets and larger coupon step-ups may be a recipe for a premium in the future.

As shown in the relative value chart below, there is no clear conclusion to be drawn on VodafoneZiggo’s recent (in green) SLB issuance compared to their outstanding debt.

We did, however, observe a greenium in Telecom Italia’s debut green bond in January 2021. The €1bn senior notes issuance provided the group with its cheapest financing ever, coming in at half its average cost of debt.

Although European high yield markets are stalled at the moment, green-labelled debt has had a strong start to the year compared to previous. In February, two issuers, Fabbrica Italiana Sintetici (FIS) and Hurtigruten, joined the growing list of companies to issue sustainable financing.

Hurtigruten became the first cruise line company to issue a green bond, when it priced a €50m SUN due 2025. The deal carried a 11% (98 OID) coupon, proving an issuer's credit profile is not overlooked even if it carries a green tag. The €50m of proceeds will be used to finance the upgrade of three ships in the Hurtigruten Norway fleet. These refurbished ships will become some of the very few hybrid-electric powered cruise ships in the world, enabling the group to cut CO2 emissions by ~25% and Nitrogen Oxide emissions by ~80% per ship.

Issuing more green-labelled debt is not beyond the realms of possibility for the group. Hurtigruten may take a leaf out of Hapag-Lloyd’s book, by following a green loan financing with a sustainability-linked bond. This makes sense, as the green proceeds will help any future sustainability performance targets (in particular the reduction in emissions), while also allowing the group to reap the benefits of marketing a SLB.

FIS, the global contract developer and manufacturer for pharmaceutical ingredients, became the next company to join the SLB fray. The deal featured three sustainability performance targets and was assessed by Sustainalytics as below:

Source: Sustainalytics Second Party Opinion

Whilst SPT 1 is reportedly aligned to a Science-based Target Initiative (SBTi) of ‘well below 2°C’, the remaining two targets lack peer comparison or science-based targets. FIS is yet to set any medium or long term environmental targets, however, the company has stated its intention to set an SBTi commitment within the next 1 - 2 years (reliant on Scope 3 reporting). Further ESG analysis can be found in our QuickTake. If you are not a client but would like a copy of our ESG QuickTake, please complete your details here. 

The penalty attached to the targets includes a redemption premium of 20bps per SPT which will be tested in December 2026. The Group will also test these targets annually, so the Group will be penalised if the target hasn’t been met and the debt is refinanced before the Final Testing Date.

With markets shut from mid February due to Russia’s invasion of Ukraine (with further ESG analysis of the conflict to come separately), and deteriorating in the weeks prior, there’s been little primary to report in recent weeks.

We did see one sustainability-linked instrument clear markets though, with Astorg sealing the deal on its LBO financing for French ink film producer ARMOR-IIMAK. The €410m TLB, accompanied by a €40m-equiv dollar tranche, landed at 500bps over Euribor with a 98 OID, widening from initial talk as market conditions began to degrade given the Russian invasion.

The loan came with a 10 bps sustainability-linked ratchet (an on market ratchet size, as displayed below), linked to raw materials recycling (including PET film). PET (Polyethylene terephthalate, a form of plastic) is the key sustainability risk for the business, so seeing this included in the main KPI within the ESG package is reasonable justification for the 10 bps ratchet attached.

The company also launched a thermal transfer ribbon recycling programme (RecPET) in December 2021 to address the issue. RecPet is reportedly the first thermal transfer ribbon recycling program to exist. We were unable to obtain information relating to the specific SPTs (sustainability performance targets) attached to the raw material recycling KPI. Read our full write up of the LBO financing here.

The Loan Market Association has published two new ESG guides for green, social and sustainability-linked instruments (available to LMA members here), focusing on adding detail to best practice principles for the external review process for borrowers’ ESG performance, and also adding guidance for social loans, which have become increasingly topical but are yet to gain significant traction in the European leveraged loan market.

However, as we have seen with the LMA’s previously issued guidelines for sustainability-linked issuance (from May 2021), there is vast diversity in the level of compliance to these guidelines. As we have covered in previous editions of Sustainable Junk, certain issuers from Mehilainen in May 2021 to Saverglass in January 2022 have aligned their ESG packages relatively closely to these principles, whilst others have not done so to the same degree (T-Mobile Netherlands, Amedes).

Rather than dictating the terms for deal structuring, the LMA’s documentation acts more as a benchmark for buysiders to judge the strength of an ESG package, and push back if needed on looser terms, as we saw in both T-Mobile Netherlands and Amedes). As an example of the looseness of documentation in practice, although the principles state that external verification is required for sustainability-linked loans, we have found external verification clauses to not be present in ~20% of sustainability linked loans we have tracked since January 2021 (based off the initial deal term sheets / SFAs we reviewed).

In fact, a growing trend we have seen emerge in late 2021 and early 2022 is issuers bringing loans to market with ‘option to include’ clauses, meaning they have the option to add an ESG ratchet at a later point in the lifecycle of the instrument (subject to majority lender consent).

In these examples, the specifics of the ESG package are not determined during syndication — a clear negative for ESG transparency and disclosure and a deterioration of the structuring of sustainability-linked loans. Caldic’s February LBO attempted to pass this clause subject to no majority lender objection, however this was reverted to the market norm of requiring majority lender consent after buysider pushback during syndication. Read our legal analysis of the deal here (subject to verification).

A Refinitiv survey on the development of SLLs found that although interest in the asset class was strong, 78% of respondents thought that the product needs further development and 35% felt greenwashing was occurring (allowing borrowers to achieve cheaper cost of financing without meaningful ESG improvement). This underlines the point that adherence to the LMA’s guidelines is still loose and standardised methods to analyse the strength of sustainability-linked issuance remain elusive.

SLLs aside, sponsors are finding increasingly creative ways to engage with ESG-minded investors and capture larger shares of the growing pool of ESG-linked capital. Most recently, a consortium of sponsors, including Advent, Bain Capital, Cinven, Hg Capital, Nautic Partners and Permira, have partnered with Greater Share, a newly formed UK educational charity, to support a novel philanthropy fund. As the FT writes, investors will gain access to funds managed by the consortium of sponsors if they commit to donating at least half their capital gains to educational charities backed by the group.

We have also been keeping tabs on the ambitions of global sustainable infrastructure funds. Brookfield’s Global Renewables and Sustainable Infrastructure fund is a major player in the space, with $50bn in total power assets (19 gigawatt capacity) and 2,800 in house operating employees, who are able to perform maintenance and upkeep tasks on its assets. Even larger is Macquarie, which is launching a new offshore wind energy business under its Green Investment Group (GIG was acquired from the British government in 2017), with a 35 gigawatt capacity. Macquarie GIG’s second fund raised over €1.6bn in February last year (25 year closed-end). At the time, Macquarie Infrastructure and Real Estate Assets (the umbrella group above GIG) oversaw 12.3 gigawatts of green energy generation assets — a marker of GIG’s ambitions. Blackrock also raised $673m for its ‘Climate Finance Partnership' fund in November last year, again aimed at green energy infrastructure.

Our securitisation reporter Owen Sanderson has been keeping a close eye on developments in the regulation and issuance of green securitisation products, most recently looking into the European Banking Authority’s March report on “Developing a Framework for Sustainable Securitisation”. Read Owen’s breakdown of the report and its implications for structured finance in his Excess Spread newsletter here. Owen and I will also be keeping a close watch on the rapidly developing area of negative screens in ESG CLOs, which have grown significantly in number in the most recent offering docs we have seen (ESG-minded managers such as Caryle have been pushing the envelope in terms of number and scope of screens).

As mentioned earlier in our report, in the wake of Russia’s invasion of Ukraine, Germany’s subsequent defence spending ramp up and the acute leap in energy prices, the ESG status of weapons and energy companies has been thrown into question. Will CLO negative screens on weapons manufacturers and oil producers remain as stringent moving forward? Rest assured our eyes will be peeled here at 9fin.

9fin’s ESG filter has brought to light some important social and governance-related news from the previous month which are worth highlighting:

Outokumpu halts orders from its nickel sub-supplier Solway in Guatemala, after allegations on environmental damage, negative impacts on local people and lack of transparency when that were brought to the companies attention


Russian billionaire quits TUI’s board after EU sanction over Moscow’s invasion of Ukraine


Top executives at Austrian packaging company Schur Flexibles are alleged to have embezzled millions of euros and committed accounting fraud. Our coverage on the events can be found here


Paprec has escaped conviction after the death of an employee crushed in a sorting machine


Mikhail Fridman and Petr Aven, previous owners of private equity firm LetterOne, have stepped down from their respective positions with their stakes in the firm frozen in the wake of anti-oligarch sanctions

As part of 9fin's developing High Yield coverage, we will be producing more detailed ESG analysis for a number of credits. Here is a selection of our ESG QuickTakes from the previous month. If you would like to request of any of our recent ESG QuickTakes, please click on the name and complete your details to request a copy. 

Fabbrica Italiana Sintetici - ESG QuickTake


Worldwide Flight Services - ESG QuickTake

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