Klabin highlights SLB opportunity in LatAm

IFR 2365 - 09 Jan 2021 - 15 Jan 2021
3 min read
Americas, Emerging Markets
Miluska Berrospi

Brazilian paper manufacturer Klabin became the second Latin American issuer to dive into the burgeoning sustainability-linked bond market last week, with a strong execution highlighting the opportunity for more issuance from the region.

Klabin was the second LatAm company to sell SLBs after fellow Brazilian pulp and paper company Suzano's debut in September 2020.

The new BB+/BB+ rated bonds carried three key performance indicators, which will trigger a step-up on the bond's coupon if the goals are not met by the end of 2025. KPIs are tied to water consumption intensity, water reuse and recycling, and the reintroduction and reinforcement of water species into the ecosystem.

The US$500m 10-year senior unsecured note drew around US$4bn of orders, allowing bankers to price the notes at par to yield 3.2%, some 55bp tighter than initial talk of 3.75%.

It was the company's lowest coupon on a US dollar bond to date, and priced inside its outstanding 5.75% 2029, which was trading at a bid yield of 3.423% as of late last week, according to Refinitiv data.

Strong company fundamentals and a positive view of the sector helped boost demand.

"The ESG component added to the appeal per the structure of the coupon step-up and set sustainability targets," said Omotunde Lawal, head of the emerging markets corporate debt group at Barings.

"We view the paper and pulp issuers as being more thorough in their sustainable framework unlike some issuers who greenwash," said Lawal.

The strong execution highlights the increasing appeal of sustainability notes for LatAm issuers, as fixed income investors look for a way to satisfy ESG mandates paired with demand for higher yielding credits.

A growing number of companies are asking about potential SLB transactions, said bankers.

The region may be especially well-suited for these types of securities, particularly Brazil, which hosts most of the Amazon rainforest, said Trevor Allen, sustainability research analyst at BNP Paribas Markets 360.

“I think [LatAm] is a natural place – especially for companies in Brazil – to move toward a sustainable-linked bond, to show their credentials,” he said.

Klabin's step-up structure proved alluring for investors too with a robust amount of ESG participation throughout the roadshow and bookbuilding process, which allowed for low initial price thoughts, said a banker close to the deal.

The step-up coupons include a 12.5bp step-up fee if the water consumption KPI is not met, an 8.25bp step-up on the water reuse and recycling KPI, and a 6.25bp penalty if the reintroduction of water species goal is not met.

Still, some investors remain sceptical of the advantages of an SLB structure.

"If [issuers are] already not doing what they’re saying you may see that in the price of the bond. So who cares about a very tiny step-up in the coupon? You may be losing money on the bond," said Yvette Klevan, lead portfolio manager with Lazard Asset Management's global fixed-income portfolio. About 25% of the portfolio is invested in green-labelled investments, but none in SLBs.

Bank of America, Bradesco, Citi, Itau, JP Morgan and Morgan Stanley were lead bookrunners on the deal.