The burst of activity from Latin American issuers in international capital markets this year has involved a large environmental, social and governance (ESG) component.
Both corporates and banks have been raising funds either through structures that funnel funds into ESG-related projects or those that have pricing triggers for the issuer’s corporate ESG goals.
On January 6, BTG Pactual was the first of the region’s banks to bring a green bond to international investors – not just this year, but ever. The Ba2/BB-rated bank sold $500 million bonds at a 2.875% yield – tightening from initial price thoughts of 3.25%.
Proceeds will be targeted at renewable energy, energy efficiency, sustainable water and wastewater management, clean transportation and green buildings. There are no ticket or diversification requirements, but eligible projects should have disbursement during the 36 months preceding the issue date or in the 36 months after it.
Patricia Genelhu, head of the sustainable and impact investing group created at BTG Pactual last year, says the bank’s focus has enabled it to lead ESG finance in the region as the sector plays catch-up.
The deal was brought by BTG Pactual, Citi, Crédit Agricole, Credit Suisse, Itaú and Santander, while Crédit Agricole was also the sustainability structuring adviser.
Itaú sold its own $500 million bond one week later through Citi, BTG Pactual, Goldman Sachs and JPMorgan. That deal was structured as a tier-two from its sustainability framework. It is the first subordinated ESG debt sale from a Latin American issuer.
The bonds yield 3.95% and attracted a book of $1.2 billion after a relatively restricted roadshow of just 25 investors.
Greenium
“The sustainable finance market is much more mature in Europe,” says Genelhu. “We can actually measure the pricing benefit and you can refer to a ‘greenium’ on several different issuances.
“In Latin America, the market is still evolving and LatAm represents only 2% of total sustainable finance issuance. However, the market in this region is going to get bigger and we are starting to see that type of premium on pricing here as well.”
Genelhu says BTG Pactual’s deal was mainly sold to European and US-based institutional investors, but there was also diversification into LatAm buyers and dedicated ESG funds. She says that the additional cost of ESG structures is “marginal” for any deal of scale, and is likely offset by the pricing benefit.
There can be pricing benefit – and that is likely only to get more significant and more transparent
Patricia Genelhu, BTG Pactual
“It’s still really hard to quantify [given the lack of comparables], but there can be pricing benefit – and that is likely only to get more significant and more transparent,” says Genelhu. “There are also already other advantages to the institution [issuing such debt], such as the marketing benefits.”
One banker involved on the deal quantified BTG Pactual’s greenium at between five basis points and 10bp.
Meanwhile, the pricing benefits were larger and more transparent for the $500 million sustainability-linked bond from Klabin, a Brazil-based paper-manufacturing company.
The deal, issued on January 7, was led by Bank of America, Bradesco BBI, Citi, Itaú BBA, JPMorgan and Morgan Stanley, and attracted a book of $5.3 billion based on early price thoughts of 3.75%, before tightening by 55bp – the book falling to $3.2 billion.
The greenium on the Klabin deal was estimated to be up to 40bp – a notable pricing advantage. It has three specific triggers and a potential pricing step up of 25bp.
Pricing advantage
Anne van Riel, co-head of BNP Paribas’ sustainable finance capital markets Americas team, queries the assertion that there will always be a pricing advantage.
“That’s a bold statement, given there are a little more than 10 sustainability-linked deals globally that have been issued,” she says.
“If sustainable bonds are structured in a way that meets investor demand and it’s a credible issuer story, there is definitely a greenium to be gained, whether it’s a use of proceeds or a sustainability-linked structure. But I wouldn’t say one is necessarily better than the other.”
BNP Paribas was active bookrunner on the MercadoLibre dual-tranche transaction that priced on January 7 and included a $400 million, five-year green bond, alongside Bank of America, Citi, Goldman Sachs and JPMorgan – and BNP was also the sustainability coordinator.
Proceeds will finance a mix of clean transportation, renewable energy and energy efficiency, waste reduction and green buildings, as well as social, economic and education projects.
Van Riel says she cannot estimate the greenium for the MercadoLibre transaction, as it was the company’s inaugural bond, but she points to the fact that the syndicate tightened pricing by 62.5bp from early thoughts as a sign of strong pricing benefit from huge demand.
The total book for both tranches was $15 billion.
Van Riel expects that the recent flurry of ESG activity is the start of a secular growth trend in the region.
“Many issuers take their ESG activities very seriously, and this is a way of showing that sustainability is at the heart of their strategies, which is something that sometimes gets overlooked by international investors when looking at Latin American issuers,” she says.
