Uruguay’s US$1.5bn sustainability-linked bond was one of the highlights of the year in Latin America's primary bond market and a landmark in sustainable finance as it introduced two-way pricing to the global SLB market.
The 5.75% 2034 SLB issued in October crucially included a coupon stepdown that is payable if Uruguay exceeds its targets to incentivise outperformance in addition to a more customary step-up to penalise underperformance.
“The market’s embrace of the innovative concept of a potential stepdown feature suggests that investors have incorporated the notion that a country’s potential environmental outperformance can lead to lower credit risk,” said Herman Kamil, head of sovereign debt management at Uruguay’s Ministry of Economy and Finance.
Introducing two-way pricing into the SLB market was a major breakthrough. Although symmetric two-way pricing has existed in the sustainability-linked loan market since 2017, bond investors have refused to accept any stepdown structures since the first SLB in 2019.
Overcoming well-rehearsed arguments that coupon stepdowns contravene investors’ fiduciary duty to their stakeholders took more than a year of work and significant effort.
Uruguay’s determination to turn its so-called Nationally Determined Contributions into financially binding commitments that are aligned with the Paris Agreement on climate change was key to the deal’s success.
“The government was very clear that without the two-way pricing feature, they would not be interested to move forward,” said Adam Bothamley, global co-head of debt capital markets at HSBC.
Extensive roadshows allowed underwriters Credit Agricole, HSBC, JP Morgan and Santander to build the narrative and counter pushback. “Eventually, investors realised that a commitment to the stepdown incentive was politically important for the government, and they bought into the deal,” Bothamley said.
Picking a window to issue in a volatile year was also challenging but the deal attracted significant demand with a US$3.96bn order book from188 global accounts, including 40 new lenders.
For the structure to work, Uruguay had to show that its key performance indicator targets – to reduce greenhouse gas emissions and to maintain the size of its native forest area – were truly ambitious.
Failure to reduce CO2 emissions by at least 50% and preserve at least 100% of native forest by 2025 will trigger a typical coupon step-up penalty but Uruguay will only receive a stepdown payment if it reduces emissions by 52% and increases its forest area by more than 3% by 2025.
Uruguay’s innovation sends a signal to borrowers that more affordable finance is available in return for performing – or exceeding – sustainability strategies. "Uruguay's leadership is going to inspire,” said Romina Reversi, head of sustainable investment banking for the Americas at Credit Agricole.
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