For Alberto Bezzi, senior banker in Crédit Agricole’s corporate and investment banking team based in Milan, working with Prada on its recent sustainability linked loan (SLL) made perfect sense.
“The luxury fashion industry is a leader in terms of the sustainability agenda,” he says.
“Given the brand’s focus and our expertise in this area, we believe that working together on the sustainability linked loan was a natural next step for the both of us.”
In addition to arranging the deal, Crédit Agricole also acted as sustainability coordinator, sustainability adviser and facility agent, and Crédit Agricole Italia acted as the lender.
A Prada spokesperson tells Euromoney: “This is a first for Prada and first for the luxury fashion industry, so we were keen to work really closely with the bank to ensure that the technical terms of the deal fitted our sustainability vision.”
“Discussions about the loan began in the spring and were finalized on November 5, so all in all we hashed out the details relatively quickly. Now that the first deal is done, we hope that other luxury retailers follow in our footsteps.”
Key performance indicators
The €50 million loan over five years is linked to three key performance indicators (KPIs): the use of Prada Re-Nylon – or recycled nylon – to produce goods; the amount of training hours for employees; and the number of stores and factories with gold or platinum leadership in energy and environmental design (LEED) certification.
LEED certification is an independent verification of a building or area’s sustainable features, allowing for the design, construction, operations and maintenance of resource-efficient and cost-effective buildings.
So far, Prada has 19 international sites certified gold or platinum. The company plans to certify more buildings during the next five years, but they would not disclose any specific targets when asked by Euromoney.
Details around training were not disclosed either, although an update regarding this is set to be published in the company’s sustainability report published towards the end of the year.
However, Prada does state that all the nylon it uses will be the recycled alternative before the end of the five-year term.
According to Pascale Forde-Maurice, a sustainable banking expert at Crédit Agricole, loan commitments were defined at inception to link with Prada’s own sustainability agenda to include a margin indexation on sustainability commitments.
“This is what makes this product unique,” she says. “Through SLLs, lenders consider counterparty risk through things including credit ratings, but also through complementary financial performance measures, such as KPIs linked to ESG [environmental, social and governance].
“This is increasingly becoming part of the counterparty risk process that many banks are developing today, so we can expect businesses will follow this trend as well – to shift the dialogue towards internal ESG goals.”
Pascale Forde-Maurice adds: “[This will] enable us to incorporate much more emblematic commitments of one group and of one internal organization, as opposed to generic goals that may not be suitable for all business ends.”
SLLs that focus on ESG goals are becoming more popular for companies that hope to highlight improvements to their sustainability agenda over time, says Andrew Stanfield, a lawyer at Linklaters who is familiar with sustainable loan products.
According to data collected by Bloomberg, volumes of SLLs hit $10.6 billion in 2017 and rose to $43.2 billion in 2018. In the first half of 2019, volumes were $36.1 billion, with $81.3 billion predicted for the full year.
European markets lead global SLL volumes, with a share of more than 80% of the market between 2017 and the first half of 2019, according to Bloomberg. Activity has focused mostly on Spain, France and Italy.
“There are two main ways to assess ESG performance in an SLL,” explains Stanfield. “A third party can rate the overall ESG score of a company periodically with performance over time assessed by reference to earlier overall scores, or certain KPIs relating to ESG goals can be agreed between the lender and the borrower using metrics tailored to a specific business.
“Either route is valid as long as the targets are meaningful.”
He adds: “As SLL products evolve, so are pricing trends. Early loans usually worked one way – there was a discount if the borrower met specific targets, but no penalty if they were missed. Two-way pricing structures are now common, where interest rates can increase if targets are missed.
“On some transactions, pricing changes are achieved through changes to fees rather than interest.”
And interest-rate changes are normally minimal.
“Looking at many corporate loans, we are often talking somewhere around two to four basis points, but what is important to note here is that pricing may not be the primary motivation – borrowers value the chance to demonstrate a commitment to improve ESG performance,” says Stanfield.
There are some limitations to SLLs, he says, adding for example: “Smaller companies may find it relatively expensive to set up the infrastructure to monitor sustainability goals.”