ESG Bonds Rates

Uruguay adds World Bank loan to sustainability-linked firsts

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Uruguay has built on its landmark sustainability-linked bond by becoming the first sovereign to sign a sustainability-linked loan with the World Bank.

The supranational expects the SLL, whose interest rate ratchets down if the borrower meets a climate target, to serve as a model for other sovereigns’ borrowings.

While the US$350m SLL’s full structure is unconfirmed as it has yet to be approved by the World Bank board, a statement by managing director for operations Anna Bjerde and Uruguay’s economy minister Azucena Arbeleche during the International Monetary Fund/World Bank meetings in Marrakesh revealed that the Latin American country could save up to US$12.5m in interest payments if it achieves the target embedded in the loan.

The target relates to the methane intensity of Uruguay's beef production. This is a different measure than its SLB uses, though it is a major component of the country's overall greenhouse gas emissions whose reduction is one of the bond's targets. 

The Marrakesh statement said that the step-down would depend on the country going “beyond its Paris Agreement commitments to lower the intensity of methane emissions from its livestock sector”.

According to the UN's Food and Agriculture Organization, agriculture accounts for as much as 75% of Uruguay’s emissions. Methane from animals’ digestive systems contributes more than half of the sector’s emissions.

This makes the gas's contribution nearly 50% of the country's total emissions.

The loan’s maturity, amortisation and interest rate have not been disclosed, though the rate is a spread over the 180-day SOFR average, according to people with knowledge of the deal. 

The maturity may be 15 years since Uruguay's performance against its target will be measured annually for 10 years from 2028.  

Unlike Uruguay's SLB, and many SLLs, the rate does not step up if the country misses the target. 

Verification is unconfirmed. For its SLB, Uruguay committed to have the United Nations Development Programme conduct an annual independent review of both of its targets throughout the bond’s life.

Step-down pioneer

The Latin American country was previously the first borrower to incorporate a step-down coupon in a sovereign SLB, and only the second to offer the product after Chile.

Uruguay's payouts on the bond are linked to reducing emissions and growing the area of its native forests. Under what it termed a “contingent payoff structure that is incentive compatible”, coupons step up or down or remain unchanged depending on performance against these targets.

Performance will be measured in 2025. Emissions will be assessed against a 1990 baseline and forest area against 2012.

As in its SLL, the bond will only step down if the country outperforms its commitments under its Nationally Determined Contributions – each sovereign signatory’s efforts to reduce emissions to meet the goals of the Paris Agreement on climate change.

To receive the full benefit Uruguay must reduce emissions by more than 52% by 2025 and increase the extent of native forest by more than 3%.

Sustainalytics’ second-party opinion judged these targets to be "ambitious", as well as aligned with the 2020 Sustainability-Linked Bond Principles administered by the International Capital Market Association.

The new loan could lead to other sovereign step-down SLLs. The World Bank “will seek to replicate and scale this approach to incentivise countries to provide global public goods”, the statement said.

The step-down SLL model is part of the supranational’s efforts “to create incentives for countries striving to integrate global challenges such as climate change mitigation into their development programmes”, it added.