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Hopes of a strong year for sustainable financings have been squashed with only one green HY issue to report on in May. Volvo Cars becomes one of three European HY issuers to opt for a Green Bond in 2022 - a huge shortfall compared to last year. To give some perspective, we recorded €4.3bn of Green and sustainability-linked issuance in the first five months of 2022 - whereas for the same period last year we had seen €12.6bn. This decrease is in-line with the overall European high yield market with issuance running at about a third of last year’s level YTD.

Swedish-based car maker Volvo Cars launched a new green bond with the use of proceeds going towards manufacturing, research, and sales of Zero Emission Vehicles (ZEVs). Volvo has made a large push in the Battery Electric Vehicle (BEV) market with a ~440% rise in the number of BEVs sold YoY in 2021, making up 3.7% of total sales for the company in FY 21 (from 0.7% in 2020).

Volvo is seeking €3bn in funding through its Euro MTN program (which expires in 2028), with the recent €500m issuance being green bonds. The proceeds will be used in line with Volvo Cars Green Financing Framework, with 70% allocated to manufacturing and 30% to R&D. This new green bond follows over a year after the company showcased its first ever green bond in October 2020 with similar use of proceeds targets. As of FY 21, the previous green bond had been fully utilized with 31.2% of these funds invested in Polestar, an EV subsidiary of Volvo Cars.

A number of automotive manufacturers had taken out green/sustainability-linked notes in the last two years, with Honda and Ford being notable companies with this type of debt. Although this may increase in the future with many manufacturers making the push towards BEVs and lowering emissions. Some competitors are looking beyond BEVs, such as Honda, investing part of their $2.75bn raised through green bonds in projects focused on solar and wind energy.

9fin is delighted to announce a webinar outlining the key trends in sustainability-linked deal structures that every investor should be thinking about when analysing a deal from an ESG perspective. This webinar is free for leveraged finance professionals, please click here for more information and details of how to register. 

Source: Volvo Cars Green Bond Investor Presentation, May 2022

The proceeds from Volvo’s green issuance is set to benefit the sustainability performance targets attached to its revolving credit facility. Signed in January of last year, the sustainability-linked RCF has a margin ratchet linked to the reduction in carbon emissions - also in line with the green financing framework. Therefore, the group may secure lower financing in the future if the targets are achieved. Taking advantage of green financing is not new to the market. French-based automotive supplier Faurecia launched a €400m green bond in March 2021, which was then followed by a €1.2bn sustainability-linked issuance later that year.

Given another quiet month for leveraged loan issuance, we’ll use this pause to take a look at how green finance is become baked into markets in an increasingly complex manner. As Bloomberg Opinion’s Matt Levine writes, “ESG increases the scope for financial engineering”, providing an additional class of instruments that can be used, by financial institutions, corporates, and advisory firms, to achieve additional objectives.

One example of “green financial engineering” in the leveraged loan world is Caldic’s LBO financing from February this year, with the term sheet originally containing a provision allowing the issuer to include an ESG margin ratchet at a future point in the lifecycle of the instrument, subject to no majority lender objection. This provision received buysider pushback during syndication, and the deal docs reverted to the market norm of requiring majority lender consent.

Although the looser provision did not ultimately make it to market, the use of the ESG margin ratchet provision as an additional route to try to pass aggressive covenant language puts investors on notice that advisory firms now have an additional platform for financial and covenant innovation.

The carbon credit market is another area of consistent scrutiny - with a bifurcation between regulated offset markets such as the EU Emission Trading System (ETS) and rapidly growing unregulated (and cheaper) voluntary credit markets that can still contribute towards corporate sustainability targets. The unregulated carbon credit market roughly tripled in size between 2020 and 2021, hitting over $1bn, per the FT. The VCMI (Voluntary Carbon Markets Integrity Initiative) is attempting to tackle the problem, launching an “integrity code” for carbon markets last week.

With the source of offsets often opaque in reporting, corporates are increasingly able to game their internal net emissions targets with the purchase of lower quality carbon offsets. Certain companies are also generating additional revenue through the sale of these loosely regulated voluntary offsets. For example, North American energy provider TransAlta bought 376,000 offsets in 2015 generated through the injection of CO2 underground to extract oil, under now defunct offsetting rules. For a detailed look at carbon capture and offsetting in the oil and gas sector, see Jack David’s write up here.

Other examples of difficulty in offset comparability revolve around how broadly we define “offset”. Carbon credits can be generated through “forest carbon offsets” that claim to be used to protect forested land that may be in danger of being deforested. Of course, murky evidence requirements over whether the piece of forest being protected was in serious danger of being deforested creates a tough ask in standardising this class of offsets, which have this month drawn the attention of the blockchain world: Regen Network Development has purchased $1m in forest carbon credits from King County, Washington State - the largest such sale in US history.

In this example, although the receipts from the carbon credit sale will go towards the County’s Forest Carbon Program, this involves a broad set of initiatives other than protection and expansion of forested land, including the development of public parks and such community spaces. The programme has been verified by VCS however, producing 26,317 mtCO2e of verified, registered credits - but acts as an example of the breadth of credit diversity on offer that agencies such as VCS are tasked with standardising.

In other news, disclosure continues to be a hot topic, with CLO managers still seeking to issue Article 8-aligned structures, and Deutsche Bank’s DWS making headlines after a police raid at its Frankfurt head offices amid claims that it misled investors over the ESG credentials of its assets. Regulators are now looking beyond DWS, with Goldman also entering the crosshairs of the SEC. The action taken by regulators across multiple jurisdictions this month is significant, signalling a more active vigilance of green financial products as the industry continues to proliferate. The wift follow on action taken by the SEC is particularly noteworthy, given that ESG regulation in the US has typically lagged behind Europe.

The ESG push against oil & gas has lost some of its vigour, with inflated energy prices causing investors to hesitate on demands to cut fossil fuel emissions and accelerate the energy transition, as energy security becomes more important. A breakdown of the drop in support for climate-related shareholder resolutions this year, produced by Reuters, can be seen here, with BlackRock echoing this sentiment with a statement last month that the world’s largest asset manager will back fewer shareholder resolutions at upcoming AGMs.

Global energy is at a crossroads, with long run capital destruction (worsened by Covid) in developed market energy supply having not been sufficiently replaced with productive green energy infrastructure. A relatively recent ramp up in the green infrastructure space, populated with understandably long-dated funds bidding on projects not yet developed has created a short and medium term lack of sufficient energy supply capacity; with the rate of oil and nuclear capital destruction outstripping the build in productive green energy assets.

With Europe looking to the US to solve its natural gas supply conundrum in the wake of the Russia Ukraine conflict, supply shortages and infrastructure problems will only serve to complicate the issue - with other potential energy sources taking time to come online.

The US has plenty of domestic supply issues of its own to contend with: its Strategic Petroleum Reserve (SPR) is now at its lowest level since the 1980s (given the US administration’s sixth month drawdown strategy), and per the EIA, although crude inventories have recovered from their mid March low (gross of SPR drawings), on the other hand US gasoline reserves have been in net drawn down every week since start of February, during the typical spring inventory ‘build’ season.

It might be tempting to think OPEC+ agreeing to lift its output targets will offer respite, but questions remain over both the depth of reserves and the ability of member states to meet these production targets (notice the rhetoric gradually moving away from “quotas” and towards “targets”).

As far as HY is concerned, although the energy sector continues to outperform (particularly in the US as our own David Bell writes), and support for climate resolutions at AGMs is diminishing, the question moving forward will be whether potential energy demand destruction brought about by a mid cycle slowdown/possible recession will curtail the effects of a supply side bottleneck brought about by a progressive net downsizing of energy infrastructure.

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

Paprec’s founder, chairman and principal shareholder Jean-Luc Petithuguenin is under investigation for anti-competitive practices, corruption, and misuse of corporate assets. Mr Petithuguenin has been barred from managing the Group until the completion of the decision (he intends to appeal this ruling)


Orpea is under investor pressure after its ‘Gravediggers’ scandal earlier this year, with auditors also finding “dysfunctions” at the company. Police raided the group HQ last week


KPMG issued a disclaimer of opinion on Adler Group’s FY 21 numbers


S4 Capital delayed its results, instating a new audit committee in response


A Wynn Macau director is currently being investigated over a $2.8m bribery case. The director is accused of accepting bribes from individuals at an air conditioning business in exchange for lucrative contracts servicing the casino properties


Loxam experienced a cyber incident, with a temporary shut down of corporate functions. Any potential damages incurred as a result of the attack were not immediately disclosed

9fin publishes ESG QuickTakes on all new deals. Our QuickTakes are speedy, independent analysis highlighting what is material to new issuance. If you would like a sample of any of these reports, please click on the link below and complete your details. 

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Sustainable Junk - May 2022

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