Novartis set to resuscitate KPI-linked bonds

4 min read
Ed Clark

Novartis looks set to become only the third issuer of KPI-linked bonds, injecting some vim into a product that was at one stage lauded as 'the next big thing' in sustainable finance.

The Swiss pharmaceutical company (A1/AA-) has appointed JP Morgan as structuring agent, along with Barclays, HSBC and Societe Generale as lead managers, to arrange investor calls starting today, September 15, with the intention of bringing an eight-year senior unsecured euro-denominated bond to market in the latter half of this week.

Sustainability-linked bonds, also known as KPI-linked bonds, are tied to companies' ESG strategies via key performance indicators. A failure to hit KPIs results in the bonds' interest payments stepping up.

The supply of sustainability-linked bonds has lain dormant in Europe since Italian utility Enel raised US$1.5bn and €2.5bn through separate issues of the instrument in September and October of last year.

Last week, however, some signs of life were seen in EM bond markets, where the Brazilian pulp and paper producer Suzano issued a US$750m 3.75% 10-year that included a 25bp step-up penalty tied to the company's goal of reducing carbon emissions by 15% by 2030.

Although there was much enthusiasm for the product when it first emerged in the bond market, the coronavirus pandemic has been an obvious impediment to the asset class taking off as borrowers shied away from additional complexity and experimentation at a time of crisis.

The lack of ECB eligiblity for paper incorporating a step-up and the clear public scrutiny that the bonds entail in relation to a company's ESG credentials may also have put some issuers off the instrument.

However, the structure, if done right, with sufficiently challenging KPI targets, can be a clear way to align a company's funding strategy with its overall corporate strategy.

"[Novartis] want to put their money where their mouth is," said a banker involved in the new transaction.


At the start of September, Novartis announced management targets covering environmental, social and governance topics.

These included goals such as increasing patients reached with strategic innovative medicines in low and middle-income countries by 200% by 2025 and launching Novartis Access, a portfolio of medicines offered in lower-income countries at lower prices, in 30 countries over the coming years.

In addition, the company targeted increasing patient reach of global health flagship programmes in leprosy, malaria, Chagas disease and sickle cell disease by 50% by 2025 and achieving full carbon neutrality by 2030.

Novartis is not, however, without its controversies. Over the summer, the company agreed to pay more than US$729m to settle US government charges it paid illegal kickbacks to doctors and patients to boost drug sales.


Although Tuesday's European primary markets were devoid of activity, syndicate bankers say that there are plenty of trades in the works and the rest of September should remain busy.

Crossover credit KION Group (BB+/BBB-), the German industrial active in trucks and supply chain solutions, has mandated BNP Paribas, Commerzbank, Goldman Sachs and UniCredit to arrange investor calls, which started today, for a potential €500m five-year.

Scentre Group (A2/A/A), the Australian shopping centre REIT, may also look to fund in the euro market, having at the start of this week announced the possibility of issuing subordinated notes with a seven-year non-call period.

The issuer is also preparing inaugural US dollar subordinated bonds with non-call periods of six years and/or 10 years with a final maturity of 60 years.

And Marubeni (BBB/Baa2) has been holding calls with European investors for a fixed-rate US dollar five-year Reg S benchmark. The Japanese industrial is one of the largest sogo shosha, the trading houses which dominate Japan's trade.