In the once-revving market of sustainability-linked loans, things have slowed down in the past year. Borrowers are waiting for regulation to be clear and are reassessing their next steps — and lenders are more careful and thorough when structuring these deals.
For borrowers wanting a breather before having to finalise an SLL, there is a solution: the ‘sleeping SLL’. The loan can be signed with the legal potential to become an SLL, but the actual sustainability criteria can be agreed between borrower and lenders later.
Hold your yawns and dream big! This market feature is not an inertia enabler or a prolonged slumber, but more like setting an alarm clock for an eventual and inevitable wake-up call.
Market participants have sniffed in disapproval at this in the past, and even snorted in disgust. Even GlobalCapital has criticised it.
But the reality is that the moments when borrowers need capital are not necessarily correlated with when they have the mental space and organisational capability to create a robust sustainability strategy.
In fact, being in the thick of an important corporate action such as an acquisition is about the last time to make wise long-term plans.
And sustainability conditions should not be seen as an easy bolt-on to a loan, but as organically connected to a thorough corporate strategy. Setting credible targets takes work, particularly for smaller companies just starting their ESG journeys.
Why not, then, decouple the funding from crafting the incentive structure?
A sleeping SLL can give a company six or 12 months to assess what KPIs to work towards and gather data for disclosures.
It can be used particularly in M&A financing. Deferring sustainability commitments until the dust from the takeover scuffle has settled is not only basic pragmatism. It means the company can think more deeply and clearly about what it can achieve in sustainability. The resulting targets are likely to be more carefully thought out and tailored to the company’s needs.
The loan market should grace the right borrowers with the gift of sleep, to help the market wake to a brighter day for sustainability-linked financing.