Sovereign landmark
Chile’s US$2bn landmark carried sustainability-linked bonds beyond their usual corporate issuer base, demonstrating that the most important development in ESG debt since the emergence of green bonds more than a decade earlier can work for sovereigns too.
The deal was the first to link a country’s Nationally Determined Contributions under the Paris Agreement on climate to its financing commitments using an SLB structure.
The 20-year deal was “a very good option to demonstrate that the environmental commitment of Chile is not related to one administration – it will be very strong and will continue over time”, said Patricio Sepulveda, head of the Chilean Ministry of Finance’s public debt office.
It also underscored the Latin American nation’s ESG leadership.
Even before the SLB, its unmatched range of green, social and sustainable bonds in international and domestic markets had given use-of-proceeds instruments an unmatched 25%-plus of its debt outstandings
Chile’s success confounded the long-standing argument that SLBs would not be appropriate for sovereign issuers.
Despite the alignment between Chile’s NDCs and sustainability targets, its step-up feature troubled many bankers and investors. They insisted that taxpayers could not be on the hook for higher payouts if the issuer missed key performance indicators.
In early March Chile’s confidence was vindicated when it attracted over US$8bn of investor demand for a deal linked to reducing its greenhouse gas emissions and increasing its share of renewable energy – to 60% by 2032, up from 27% in 2021.
Second-party opinion provider Sustainalytics judged the sovereign’s targets “ambitious” and “highly ambitious”, respectively. Chile will pay an additional 12.5bp if it misses either target.
“We had investors who wanted to be in this deal because they felt it was so important,” said Gordon Kingsley, head of Latin America DCM origination at Credit Agricole.
Strong demand allowed Chile to tighten price talk of 240bp over US Treasuries by as much as 40bp. It was also able to drop the 15-year euro tranche also marketed by lead managers BNP Paribas, CA and Societe Generale.
As much as 68% was sold to US investors. The remainder was spread between Europe, Latin America (mostly Chilean accounts) and Asia.
Pricing at 4.346% represented a 10bp greenium versus a comparable vanilla bond, the public debt office calculated.
The deal opened a valuable additional ESG financing channel for sovereigns with limited green or social assets which struggle to issue use-of-proceeds bonds. Having long been marketing a version with two-way pricing, Uruguay followed suit with the second sovereign SLB in October.
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