The triggering of higher coupons on sustainability-linked bonds (SLBs) issued by Italian energy company Enel after it fell short of its emissions intensity target has been described as “a watershed moment” for the developing SLB market, although an investor raised concerns about such events potentially weakening issuers’ sustainability performance motivations.
Other SLB issuers have also failed to hit the targets attached to the bonds, but Enel’s case is particularly important as the utility firm is a pioneer in the market and the largest, most prolific, corporate issuer of SLBs globally.
Investors in 10 of its outstanding SLBs will now receive millions of euros in additional interest payments from the company, after it last week published information confirming that it missed its target for reducing Scope 1 emissions intensity from power generation.
This triggered a 25bp step-up in the coupon on the 10 bonds, which represent roughly a third of Enel’s SLB issuance of about €29.5bn.
Analysts at Sustainable Fitch said this event was a “watershed moment” for the SLB market and could help restore confidence in the format, which has faced scepticism due to concerns about the materiality and level of ambition of the performance targets attached to the bonds.
“While market conditions look set to remain challenging with subdued issuance of SLBs, at least in the short term, the Enel case could nevertheless be a turning point for investor sentiment towards the format,” wrote William Attwell and Alexandra Bettou in a note on the Enel case.
“The fact that the target was missed demonstrates that it was ambitious in the first place, creating a reference point that other issuers who wish to demonstrate notable sustainability goals could mimic.”
This take was echoed by Erik Bennike, head of equities and credit at PensionDanmark, although he also suggested a possible hitch.
“The fact that we are beginning to see issuers miss their SLB targets is overall a positive development – in essence a proof of concept,” he told IPE. “One caveat though is that issuers missing targets might feel discouraged to try and hit their sustainability targets if they prove to be unrealistic in the medium term, undermining their sustainability efforts.
“What it boils down to is that issuers and investors should structure SLBs that have ambitious, but also realistic targets.”
The market reaction to Enel’s news was swift, and “dramatic”, according to Josephine Richardson, head of research at Anthropocene Fixed Income Institute (AFII).
The market did not react much when the think tank last year signalled that Enel was likely to miss its SLB targets, but in the wake of the issuer confirming this last week affected Enel euro-denominated and US dollar-denominated SLBs rallied substantially, outperforming unaffected instruments by 0.59% on average.
In a new note on Enel’s target miss, Richardson said the triggering of the step-up coupon would “test a developing market, but can also deliver a vote of confidence on the structure”.
“However this missed target affects investors’ views of Enel’s sustainability commitment, there is a clear structural difference between how its bonds are performing, with affected SLB bondholders being supported by the step-up coupon,” she wrote.
“Now the market has demonstrated the value of this hedge, it is more likely that future SLBs with ambitious targets will be well-received, and enjoy attractive pricing.”
Looking for IPE’s latest magazine? Read the digital edition here
No comments yet