Pushing harder in a crisis
Enel continued to blaze a trail for sustainable finance in 2020 by adding a new range of financing instruments to its sustainability-linked philosophy and providing powerful advocacy for the asset class that it helped to create. For showing how it’s done in style in a crisis – and for the second year running – Enel is IFR’s Sustainable Issuer of the Year.
The Italian utility did not sit back on its laurels after introducing the world to sustainability-linked bonds in 2019, but used its experience as a repeat issuer to continue to drive the development of the new asset class by creating the first sustainability-linked financing framework.
The framework embedded the sustainability-linked strategy across financing instruments including bonds, loans, commercial paper and an innovative bilateral cross currency swap. All instruments were linked to the same key performance indicator targets, and the sustainability performance targets used to calibrate them.
“It was a very important year for Enel after pioneering the new instrument, we tried to go further with our strategy,” said Alessandro Canta, head of finance and insurance at Enel.
Enel selected two KPIs for the framework, focusing on scope 1 greenhouse gas emissions and increasing the percentage of renewable energy, both of which are aligned with its broader strategy to limit global warming to 1.5 degrees.
Instruments with intermediate maturities were linked to the renewable energy KPI and those with longer maturities were tied to the greenhouse gas KPI, while the SPTs update on a rolling basis as the business plan is revised annually.
Using the sustainability-linked concept on more instruments showed a coherent financing strategy and offered a blueprint for transitioning companies that are trying to decarbonise as the push to meet net zero emissions targets accelerates.
"Linking the whole of your financing to particular targets makes it even more powerful in terms of the signal you're giving to the market," Federica Calvetti, head of ESG DCM for EMEA at Deutsche Bank said.
Enel’s comprehensive strategy had the added upside of creating as much product as possible to cater to booming demand for ESG debt as investors scramble to fulfil their own pledges while sustainable finance continues to move into the mainstream.
“We made a strong commitment to the market by authorising a wide range of sustainable financing products, and that was also very much appreciated by investors,” Canta said.
A third of Enel’s gross debt is now sustainable, which is expected to reach 50% in 2023 and more than 70% in 2030 through refinancing and raising new sustainable debt, as the company outlined in November when it presented its 2021–2023 strategic plan and a 10-year vision to 2030.
The impact of the Covid-19 crisis delayed the expected take-off of the SLB product as markets reeled and borrowers rushed to shore up liquidity, but Enel was working hard behind the scenes putting market infrastructure in place.
For most of 2020, Enel remained the only company to have issued an SLB after its groundbreaking deals of late 2019. This practical experience allowed the company to play a key role in helping to draft the International Capital Markets Association’s influential Sustainability-linked Bond Principles.
The principles defined KPIs and SPTs as well as bond characteristics, reporting and verification, and were issued in June. Their publication prompted a wave of deals in the second half of the year as SLB issuance finally started.
“We contributed massively to the new principles that were issued in June,” Canta said.
At the same time, pressure was building on the European Central Bank to remove another roadblock to issuance by changing its policy to accept SLBs as collateral despite the coupon step-up that had previously ruled out the product.
Enel was already talking to the European Commission and collaborating on other vehicles linked to the EU’s €750bn Next Generation recovery fund, and was in the right place at the right time to help to resolve the impasse.
The company held talks with Italy’s central bank and the ECB as well as banks and on September 22, the ECB announced that bonds with coupons linked to sustainability performance targets would be accepted as central bank collateral and would be eligible for its asset purchase programmes from January 1 2021.
“The ECB made a tremendous step when it comes to the importance of the sustainable market. At that point in time, the product became an asset class,” Canta said.
Enel was busy all year, raising a €5bn sustainability-linked loan in April, followed by a commercial paper programme of up to €6bn in May, which was based on the UN’s Sustainable Development Goal number 7 for affordable and clean energy.
The deal is one of the first CP programmes to be issued in sustainability-linked format, and cannot be used if Enel fails to hit its KPIs, rather than incurring a penalty due to its short-term maturity.
“We were the first to commit on our CP. If for whatever reason we don’t respect our target, the commercial paper will be dead and we will not be able to use it going forward,” Canta said.
Activity built to a crescendo in October with a remarkable flurry of activity. The new framework was unveiled along with the first-ever sterling SLB, the £500m bilateral cross-currency swap to swap the proceeds to euros, and another €1bn SLL.
The £500m, seven-year SLB, which was known as “Project Clash” internally, was aligned with ICMA’s SLB principles, with a second-party opinion from Vigeo Eiris, and proved to be an unqualified success after raising an orderbook of more than £3bn, including a £214m order from Legal & General.
The deal completed an important hat trick as Enel became the first company to issue SLBs in all three major currencies (dollars, euros and sterling) to boost its investor base. Completing the trio allowed Enel to put a value on sustainability by calculating an average upfront discount of –15bp across the deals.
As a regular sterling issuer, Enel decided to forgo the small price advantage of issuing in euros at the time, or even waiting to issue an ECB-eligible transaction in early 2021, in order to follow its strategy and maintain diversification.
“We were not in a wait-and-see mood. We were already planning to issue sterling, according to market conditions. It was part of the strategy,” Canta said.
The strategy paid off as the final spread implied a new issue concession of –10bp and a considerable tightening of 30bp from IPTs.
Enel used a pioneering £500m derivative to swap the sterling proceeds back to euros. The first-ever bilateral sustainability-linked cross-currency swap is one of the first sustainable debt instruments to require a bank counterparty to match a company’s KPI commitments with similar pledges of its own.
This two-way commitment is expected to be seen more in 2021, as banks’ portfolios and lending continue to come under greater scrutiny.
“It’s the first product of this kind; of course also other banks are moving to this kind of approach,” said Nicole Della Vedova, Enel’s head of corporate finance.
Enel pledged to pay a step-up if it missed its renewables KPI target, and JP Morgan committed to a similar step-up if it missed its own KPI target to lend at least US$200bn annually in financing to drive action on climate change and the UN’s SDGs from 2020 to 2022.
Enel is a big user of derivatives as it hedges its purchases of raw materials and capex investments, and is now looking at moving all of its derivatives portfolio into a similar structure, Canta said.
The flexibility of the framework makes it relatively easy for Enel to add other financing instruments, and it is considering new sustainability-linked instruments for 2021, including subsidised and development finance, factoring and trade financing, and shows no signs of slowing this year.