FILE PHOTO: An illustration of US dollars, Swiss francs, British pounds sterling and euro banknotes, taken in Warsaw January 26, 2011. REUTERS / Kacper Pempel / File Photo
June 9, 2021
By Yoruk Bahceli and Simon Jessop
LONDON (Reuters) – Words can be cheap in the credit market, now some lenders are looking to change that.
In recent years, borrowers have been able to lower their interest costs in return for meeting environmental, social and governance (ESG) goals. That trend has been accelerated this year by private equity firms looking for some part of the action.
ESG-linked lending reached $ 87 billion in the first quarter, three times the amount from the same period last year, according to data provider Refinitiv.
With billions flowing into the market, some lenders are cautious about taking borrowers’ word that they will achieve their goals in everything from reducing food waste to promoting more women.
“The burden of proof will increase. Be prepared, ”said Mark Wade, Head of Sustainability Research and Stewardship at Allianz Global Investors. Three industry associations representing underwriters, law firms and asset managers in Europe, the US and Asia revised their sustainability-related lending policies last month.
They are now saying that borrowers need to get an independent, external review of their performance against goals, a change being driven primarily by the investors buying the loans and the lenders arranging them, according to the London Loan Market Association.
The revised guidelines were triggered by developments across the credit market, but coincided with the move from private equity to sustainability-related credit.
Under pressure from investors to show that their leveraged buyouts are not just about generating returns, private equity firms that often use sub-investment grade leveraged loans to fund the buyouts were 95% lower. of ESG-linked issues in Europe According to financial information provider Reorg Research, the credit market has received a junk rating so far this year.
Disclosure has always been a challenge for credit investors, and particularly creditors of private equity portfolio companies. Many are private companies and, unlike bonds or stocks, loans are not public securities and so they are not subject to the same disclosure requirements.
“The biggest criticism we hear is the problem of having data to assess the situation,” said Armin Peter, Head of Sustainable Banking and Global Head of Debt Capital Markets Syndicate at UBS.
ESG-linked lending in 2021 https://fingfx.thomsonreuters.com/gfx/mkt/xlbvgkwzjvq/0F9Fx-esg-linked-loan-issuance-booms-in-2021.png
LEVERAGED CREDIT BOOM
It is unclear how far and how quickly the voluntary guidelines will be adopted.
Some market watchers expect this to be an evolution where independent review of ESG targets will eventually become the norm, as is the case in the public bond markets.
In the short term, however, the high demand for leveraged loans that outperforms supply, in addition to the booming demand for ESG products, means that borrowers can often get the upper hand and evade third-party supervision.
According to Reorg, the issuance of ESG-linked leveraged loans this year increased 14-fold to 19 billion euros by May compared to 2020.
“The liquidity offered versus the high-quality use cases has an impact on the terms achieved,” said Murad Khaled, Head of EMEA Leveraged Finance Capital Markets at Bank of America, which has arranged sustainability-linked loans for companies by Carlyle and CVC are supported.
According to Reorg, ESG-linked leveraged loans enable savings in loan costs of between 0.05 and 0.15 percentage points if the targets are achieved, while the costs rise similarly if the target is missed.
Almost two-thirds of deals don’t require a third-party verification that ESG goals have been met, Reorg data showed.
Certainly, if the data is readily available in a company’s periodic disclosures, not all targets need external review, say investors and bankers. But the demand for supervision is also growing within the private equity industry.
Four months after the buyout company Carlyle Group negotiated a financing package of CHF 413.5 million (USD 452 million) for the takeover of the Swiss watch manufacturer Acrotec, it is still negotiating, according to two, as it is the most important Lender Blackstone can show that he is achieving his sustainability goals by using familiar sources.
Carlyle has been offered a loan from Blackstone Group Inc’s credit arm that will lower the interest rate if Acrotec meets sustainability goals such as limiting energy use and recycling.
A revolving facility has also been negotiated, the cost of which is reduced when the funds are used on a project that has “measurable environmental benefits”.
Blackstone wants an independent party to verify that Carlyle is achieving his goals, according to a source familiar with his stance. Carlyle, on the other hand, wants the third party to only be involved in setting the goals and expects Acrotec’s management to certify compliance, another well-known source said.
Carlyle’s Global Head of Impact Megan Starr said their companies’ self-reporting on sustainability goals is no different from the way they report other data regarding their liabilities to creditors.
“You have a fiduciary responsibility that the data is correct,” she said.
(Reporting by Yoruk Bahceli and Simon Jessop in London; Editing by Greg Roumeliotis and Carmel Crimmins)
This article originally appeared on www.oann.com