Sydney Airport lands Australia’s first syndicated SLL and illuminates the flightpath for others
Participants in Australia’s first syndicated sustainability-performance-linked loan (SLL) say the product could catalyse a significant uptick in corporate engagement with environmental, social and governance (ESG)-linked funding. SLLs are becoming more prominent globally and Sydney Airport’s debut demonstrates that they can have wider applicability for corporate borrowers than other ESG debt instruments.
Sydney Airport finalised a A$1.4 billion (US$971.1 million) SLL transaction on 23 May with ANZ and BNP Paribas as sustainability coordinators and joint bookrunners. More than 10 other banks participated in the deal. Allens was advisor for the syndicate of banks while King & Wood Mallesons was advisor to Sydney Airport.
The deal is tranched across three-, four- and five-year maturities. According to ANZ, it is the first syndicated SLL in Australia, the largest in the Asia-Pacific region and the largest in the airport industry globally. KangaNews understands the deal is among the first SLLs globally that aligns to the sustainability-linked loan principles published by the Loan Market Association in March this year.
Market participants estimate the SLL market globally to have reached approximately US$60 billion in total volume since the instrument was first used in 2017.
SLLs incentivise improvement across a broad range of ESG outcomes by offering a margin benefit when targets are achieved and, in some cases, a penalty when they are not.
Sydney Airport’s is the second sustainability performance-linked loan in Australia market, after Adelaide Airport signed a A$50 million seven-year deal with ANZ in December 2018.
This deal included a pricing incentive for meeting ESG outcomes and a nonfinancial penalty for missing them. Sydney Airport’s deal includes the financial incentive as well as a financial penalty if ESG targets are not met, according to Katharine Tapley, head of sustainable finance at ANZ in Sydney.
Michael Momdjian, group treasurer at Sydney Airport, says establishing a two-way link between sustainability performance and funding costs provides the borrower with further impetus to drive performance. He emphasises, though, that achieving sustainability goals is a priority for the airport regardless of financial incentives.
Sydney Airport’s ESG outcomes will be assessed annually by Sustainalytics, using its ESG risk rating to distil a myriad of sector-specific factors into a single performance measure. The issuer’s target initiatives are in areas including corporate governance, human capital, business ethics, emissions, effluents and waste, and health and safety.
Momdjian says Sydney Airport hopes basing the SLL on a holistic performance measure, as opposed to one or more of its internal metrics, will help drive improvement across a range of ESG concerns.
The corporate green-bond market has flickered in Australia but issuance has yet to match up to the scale of sustainability commitments evolving on the issuer or investor sides. Market participants say the SLL product could offer corporate borrowers three key elements missing from the green-bond space: an explicit pricing incentive to meet ESG targets, the loan format that corporate Australia tends to rely on for the bulk of its debt funding, and asset flexibility.
Green bonds, and indeed green loans, have strict use-of-proceeds (UOP) restrictions that require substantial scale of verifiable assets. By contrast, SLLs can be used for general corporate purposes. This enables corporates to highlight the transition measures they are taking to improve ESG performance.
Chris Ruffa, managing director for energy and infrastructure, investment banking Asia Pacific at BNP Paribas in Sydney, tells KangaNews: “Green bonds and loans need to identify investments and capex to support the green designation, so there can often be scale restrictions. It stands to reason that SLLs may have greater application as they take these constraints out of the equation.”
Momdjian says Sydney Airport would like to issue green or sustainability bonds once it has identified a meaningful volume of assets to fund or refinance. The fact that it has not yet been able to do so but was still able to issue a jumbo SLL demonstrates the additional flexibility the new product offers.
Optimism around SLLs rests on their ability to provide a further incentive to companies to meet Paris Agreement targets. Tapley says pressure to meet these goals is increasingly factoring into the strategies of Australian companies. Furthermore, local regulators are increasingly focused on climate-related risk and emphasising that it translates directly into financial risk.
“All of these factors are pushing boards, chief executives and executive management into thinking about their strategies and how sustainability is connected, which then filters into treasury teams. Climate-change risk poses challenges and opportunities – and those opportunities often need funding,” Tapley adds.
The SLL product also brings incremental liquidity into the lending space. ANZ and BNP Paribas have established credentials in ESG funding, and Momdjian says that Sydney Airport reached out to existing and potential new banks for the loan. He says it was interesting to observe the differing levels of experience among banks in providing sustainability-linked financing.
He adds: “While it was important to appoint coordinators with leading sustainability credentials, we welcomed the opportunity to bring less familiar banks up the curve in what may become a popular source of financing among borrowers in Australia and New Zealand.”
Tapley is confident that momentum is gathering and that SLLs are an important part of a broadening suite of ESG-linked products available to Australian corporates. “The liquidity for SLLs and other sustainability-linked products is undeniable; 2019 is the year of the ESG loan.”
On the issuer side, Ruffa says Sydney Airport’s own corporate ESG leadership and innovation in finance were already well-regarded by the market. In this context, the borrower was not a surprise first mover in the SLL space. But Momdjian says it wanted to achieve more than a proof of concept, even in an inaugural deal.
“We wanted our SLL to be seen as a viable and well-supported sustainability-linked financing alternative across the issuer and lender community,” he tells KangaNews. “We hope it will create a ripple effect of issuance locally, regionally and globally.”
Like green bonds, there is nothing inherently complex about the financial structure of the SLL that should exclude lenders or borrowers. Gavin Chappell, Sydney-based head of loan syndications at ANZ, says: “The actual syndication was no different than usual, but all the parties had to get up to speed with the sustainability performance-linked aspects as well. This was a significant step for the market.”
In fact, the most positive aspect of the SLL could be that it answers a need for lenders and borrowers in a format that suits both. The investor and regulatory focus on ESG in the banking sector is if anything even greater than it is in the corporate sector.
Building their own sustainable asset books is vital in this context. Tapley tells KangaNews: “The transition to a zero-carbon world will ultimately have an impact on our balance sheet. We are preparing for this by partnering with clients that share our vision for that transition.”
There is also market share to be won by a being a leader in this lending space as corporates begin to look more seriously at ESG-linked funding options. BNP Paribas has been at the forefront of developing sustainable lending products globally and Ruffa says there is an opportunity to leverage this experience in the Australian market.
This is not unique. KangaNews is aware of a range of other global and domestic lenders looking at Australia’s corporate market with a view to increasing their sustainability-lending footprints.
For the borrower, beyond the incentive to reduce cost of funding, tying debt to ESG criteria helps demonstrate credentials that the investor base is increasingly asking for at a corporate level.
“It is clear that some investors are choosing to pass on issuance or demanding a pricing premium from borrowers that are not actively addressing sustainability-related risks. We want to reinforce our commitment to be an industry leader in sustainability proactively rather than to reactively placate risk-based concerns,” Momdjian tells KangaNews.
In a world where even corporate borrowers with strong ESG strategies in place may not be able to access the green- or sustainability-bond markets, SLLs appear to be a clear way for companies to demonstrate to debt investors that they are on a suitable path.