IJGlobal shares insights from joint lead manager United Overseas Bank (UOB) and anchor investor IFC, the private sector arm of the World Bank.
Green, sustainability, and social (GSS) bonds have recently been gathering pace. According to Asian Bonds Online (ABO), the GSS bonds market in Southeast Asian countries, China, Japan, and South Korea (Asean+3) reached $345.2 billion at the end of June (2021) – accounting for up to 20% of global outstanding GSS bonds.
Sustainability-linked bonds – whereby issuers commit to specific key performance targets – remain a relatively new market. The GSS bond market in Asean+3 also showed that sustainability bonds increased their share of the global market from 13.7% in March (2021) to 15.4% in June (2021).
Sembcorp’s SLB is a strong signal that the market is now ready to pursue sustainable-related financing instruments.
Sembcorp’s maiden sustainability bonds
The SLBs were under the series 002 of Sembcorp’s S$3 billion multicurrency debt issuance programme. The unsecured notes had a 2.66% coupon rate and a 10 and a half year to maturity on 6 April 2032.
Sembcorp was the bond guarantor. DBS and UOB were the joint lead managers and bookrunners. UOB also partnered with digital securities exchange ADDX to custodise and manage a $50 million portion of the bond. Allen & Gledhill was Sembcorp’s adviser.
The bonds had these sustainable-linked features:
key performance indicator (KPI) – the intensity of greenhouse gas (GHG) emission
sustainability performance target (SPT) – the condition of GHG emission intensity reduction (0.4 tonnes of CO2 equivalent per MW/h)
premium trigger event – increase interest payable by 25bp per year on or after 1 April 2026 if failed to achieve SPT
external verifier – appointment of an independent consultant to verify performance
The SLBs have a step-up margin of 25bp from the first interest payment date on or after 1 April 2026, meaning it will trigger a step-up event if the issuer does not meet its SPT before the end of 2025.
Sembcorp will use the proceeds for general corporate purposes and to refinance existing debts. Meanwhile, IFC's investment will finance or refinance Sembcorp's renewable energy or other sustainable projects.
Testing water for new financing instrument
The SLB issuance followed Sembcorp’s pricing in June (2021) of its inaugural S$400 million green bonds with a 2.45% coupon rate and a 10-year tenor. Sembcorp competitively priced the offering “with more than 90% of the Green Bonds placed to institutional investors predominantly in the Asia-Pacific and including some participation from Europe,” Sembcorp said.
The company declared the green bonds a success, which prompted the decision to explore the possibilities and technicalities of launching its first-ever SLB.
In August (2021), the energy company launched a sustainability-linked framework for transactions. The framework lays out the company’s strategic approach, KPIs, and sustainability performance targets (SPTs).
Three identified KPIs are:
greenhouse gas (GHG) emissions intensity
GHG absolute emissions
gross installed renewable energy capacity
The SPTs will measure its transformation progress towards a low-carbon and sustainable solutions portfolio and contribute to the UN Sustainable Development Goals, namely SDG 7 (affordable and clean energy) and SDG 13 (climate actions).
Sembcorp targets to reduce GHG emissions intensity to 0.40 tonnes of carbon dioxide equivalent per MW-hour (tCO2e/MWh) by 2025 and GHG absolute emissions to 2.7 million tCO2e by 2030. It plans to continue increasing its renewable energy capacity to 10GW by 2025.
DNV Business Assurance Singapore opined that the framework aligned with the following standards:
International Capital Market Association’s (ICMA) Sustainability‐Linked Bond Principles 2020
Loan Market Association (LMA), Asia Pacific Loan Market Association (APLMA), and Loan Syndications and Trading Association’s (LSTA) Sustainability-Linked Loan Principles 2021
Striking a balance in bond pricing
Sembcorp raised S$675 million through the SLBs, anchored by a S$150 million investment from IFC. The bonds were the first and largest sustainability-linked bond issuance in Southeast Asia’s energy sector.
“We hope to demonstrate the attractiveness and the availability of depth in this market. The market has immense climate investment opportunities, which require identification and appropriate financing instruments,” Lubomir Varbanov (pictured right), Head of New Business, Infrastructure, Asia and Pacific at IFC, told IJGlobal.
“A number of corporates in Southeast Asia have approached us for similar raises,” Varbanov added.
However, Sembcorp’s SLB has a less attractive yield compared to other green bonds in the region. Indonesian energy company Star Energy Geothermal in October 2020 priced dual-tranche green bonds, with the first tranche at 3.25% coupon rate and an 8.5-year maturity.
Unlike green bonds, SLBs allow more flexibility with the proceeds’ use, while green bonds usually focus on transactions related to renewables. SLBs contain a step-up event triggered when issuers do not meet their SPTs.
“From a structuring standpoint, we had to find a balance between what the investor base and markets desire and what the issuer could do to comply with the sustainability performance targets set by the bond covenants,” UOB’s Head of Group Investment Banking Edmund Leong (pictured left) told IJGlobal.
Besides, Sembcorp’s SLB includes an independent external verification to identify whether the company is meeting its SPTs. “The independent external verification from a third-party assurance provider encourages transparency, which increases confidence in investors,” explained Varbanov.
“One of the challenges is to validate that we are looking at genuine decarbonisation strategies and not some form of greenwashing. The financing instrument needs to be a strategic fit to capture the impact-oriented goals,” added Varbanov.
“Sembcorp is ahead of the curve in wanting to set a benchmark in the green and sustainability-linked debt space so that they can continuously tap the market going forward,” shared Leong.
Venturing towards bond digitisation
UOB also partnered with digital securities exchange ADDX to digitise and custodise a S$50 million portion of the bonds.
Digital bonds use technologies, including blockchain and smart contracts, to eliminate manual processes in the bond’s custody and post-trade administration. Digital bonds have been attracting growing interest from the bond market in recent years.
“Digitisation and tokenisation remain a small subset of the green and sustainability financing sector. This transaction is among the first of such digital bonds. Tech-savvy bond investors will have to buy, hold, manage, monitor, and trade bonds in a digital format," Yung Chee Leong (pictured right), Head of Group Corporate Banking at UOB, told IJGlobal.
The technology offers a single source to determine and validate bond terms, trade, or settlement, ownership, and payment instructions. Digitising bonds allows traceability of the underlying assets that underpin specific transactions, thereby helping issuers with their ESG goals.
“Though the market may not see a big wave of digital adoption just yet, the number of inbound enquiries has been significant. Once more issuers and investors get more comfortable with the technology, it may gather pace and develop into an emerging ecosystem," said Leong.
