Enel finds ample demand for debut sterling SLB

IFR 2355 - 17 Oct 2020 - 23 Oct 2020
6 min read
Ed Clark, Tessa Walsh

Enel successfully introduced the sustainability-linked bond to the sterling market on Tuesday, with the UK investor base showing a keen interest in this increasingly popular form of ESG financing.

The Italian energy company (Baa2/BBB+/A–), which last year pioneered sustainability-linked bonds (also known as KPI-linked bonds), priced £500m of seven-year notes with orders peaking at more than £2.8bn. It was Enel's fifth sustainability-linked bond offering.

"Investors are very familiar with the concept now. It’s been more than a year since the first sustainability-linked bond. Initially, there was a debate about the instrument – some analysts and investors had their doubts. But this is a serious product," said Alessandro Canta, head of finance and insurance at Enel.

For some investors the broader implications that these types of bonds have for a company's overall strategy – as opposed to use-of-proceeds green bonds that focus on specific projects – is a big draw.

"We like the concept of SLBs. The focus on the overarching corporate strategy regarding sustainability is appealing to us," said Rhys Petheram, a fixed income fund manager at Jupiter Asset Management.

And while Enel's new issue is the first of its kind in the sterling market, many of the investors targeted for the deal were familiar with the structure through Enel's offerings in euros and US dollars, said bankers at the leads.

Jupiter, for example, participated in the very first SLB that Enel issued. That US$1.5bn trade, placed in September 2019, was followed by three euro deals worth €2.5bn in total.

Price talk moved significantly on the sterling trade, highlighting the solid demand.

The spread was set at 100bp versus Gilts, well inside initial price thoughts of 130bp area. And while two lead bankers said the deal came about 6bp outside its euro curve after taking into account the cross-currency swap, Enel was not focused on the currency for purely price reasons.

"Enel is a global company and there is a lot of value in diversification. This was about reintroducing the name to the market and doing it with this instrument which they have pioneered," said Federica Calvetti, head of ESG DCM for EMEA at Deutsche Bank.


As with Enel's previous SLBs, the deal features a step-up structure, with a 25bp coupon increase triggered if the company misses its KPI.

In this case Enel must increase its renewables base to 60% of capacity by December 2022. As of June the figure was around 52%.

This is a similar KPI to that featured in the US dollar September 2025 and euro June 2024 SLBs Enel sold in 2019. In those notes the threshold was set at 55%.

The notes are the first that Enel has issued since ICMA published its Sustainability-Linked Bond Principles in June, although leads said this had no impact on the deal's outcome.

Fair value was quite subjective, said bankers. For price points, leads looked to Enel's sterling curve, consisting of 5.625% August 2024s, 5.75% June 2037s and 5.75% September 2040s, bid at 78bp, 149bp and 164bp versus Gilts.

CreditSights placed fair value around 95bp while one banker away from the deal offered slightly different figures.

"Enel went at a very tight level. From 0bp to minus 5bp was how I saw [the concession]," he said. Leads said that the deal offered no premium.

Given the clear demand for the product and Enel's desire to keep diversifying its funding, it expects to return to the sterling market.

"We don't see this as a one-off. Sterling is not the deepest market but it's still a very interesting market, not niche," said Canta.


Enel is the fifth corporate to issue SLBs since September, following Brazilian pulp and paper company Suzano, Swiss pharmaceutical Novartis, French luxury brand Chanel, and Japanese real estate developer Hulic, which became on October 9 the first Asian corporate to sell SLBs, although its deal raised just ¥10bn (US$95m) via 10-year notes.

Yet while there's undoubted momentum behind the product, some investors still have reservations. Some question whether a coupon step-up rewarding an investor for a company's failure to meet an environmental or social target is the right way to penalise issuers.

"We like the idea of a penalty, but perhaps a coupon step is not the appropriate mechanism - coupon steps are used in the market to compensate investors for a deterioration in credit quality, thereby offsetting the increased risk with increased return," said Petheram.

"However, in the case of an SLB the loss to sustainability investors is not one of risk but is instead social impact and therefore the penalty should result in compensation for that lost impact and focus on donations to dedicated social impact funds, for example."

Chanel did tweak the structure with its deal by including a different penalty clause: the company will pay a cash premium at maturity if it fails to meet its KPI targets.

And while some investors find the broader focus that these bonds have on a company's strategy appealing, others see an undefined use of proceeds as a barrier to their involvement in the product.

Barclays, BNP Paribas, Bank of America, Citigroup, Credit Agricole, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, Natixis and Societe Generale were the bookrunners on Enel's deal.