Two governments are considering issuing sustainability-linked bonds with interest rates that can change depending on hitting environmental targets — a product that, among sovereign issuers, has so far been the exclusive province of emerging markets.
Both deals are in the early stages of planning, but Slovenia’s could come as soon as next year. Mongolia’s is more likely to be the year after.
“It is too early to be discussing the size and tenor, but we would expect that a benchmark size transaction in euros is possible,” said Marjan Divjak, director general at Slovenia’s Ministry of Finance.
In a sustainability-linked bond the issuer — usually a company, but Chile and Uruguay have also issued them — defines one or more targets to improve its sustainability performance by a certain date during the deal’s life. If it fails to hit the target, the interest coupon will step up as a penalty. In a few deals, the coupon can also fall if the issuer reaches a harder target.
Divjak said the framework for Slovenia’s deal had not yet been set up and sustainability key performance indicators and targets were still to be decided, but they would likely be tied to national strategies.
Slovenia, rated A3/AA-/A, has printed use of proceeds sustainability bonds — similar to green bonds — twice before.
Divjak said Slovenia was attracted by the possibility SLBs afford, which sustainability bonds do not, to use the proceeds for any purpose.
He expects the investor base to be similar to that for the sustainability bonds, but wider. He is hoping there will be a “small but measurable greenium” of more favourable pricing for the SLB, compared with the country’s conventional curve.
Slovenia has a transparent methodology of picking bookrunners for its international bonds, based around a primary dealership system that guarantees one of the spots on the mandate for the bank that most actively trades its bonds — currently Deutsche Bank, according to Divjak. That methodology will also be used for the SLB. The sovereign is also expected to issue an international conventional benchmark bond early in the year.
SLB works for mongolia
An SLB for Mongolia would get around debt market restrictions it has laid on itself that make it difficult for it to issue green bonds. Mongolia has the technical framework to print green bonds and set up a Sustainable Development Goal framework in 2023.
But the country’s debt issuance strategy prevents it issuing use of proceeds labelled bonds. All government bond issuance has to be debt-neutral and include liability management.
Green or sustainable bonds require an issuer to spend the money on defined green projects, so such issuance would add to Mongolia’s debt pile, contradicting the debt strategy.
However, Mongolia is drafting an SLB framework, which would not trigger the problem.
Its KPIs include greenhouse gas emissions reduction, the construction of green and affordable housing and the planting of trees.
It might be a while yet before Mongolia issues an SLB, however. It does not have a Eurobond maturing until 2026, a $600m 5.125% note. And the country’s fiscal performance and economic growth over the past few years mean it would be able to repay that bond from its own coffers, without having to refinance it in the bond market.
Chile and Uruguay are the only two previous sovereign issuers. Uruguay is the only one to have used a symmetrical structure for the coupon: it can move up or down.
Financing linked to the environment remains an active area for EM governments. “More than one” debt for nature swap is planned for next year, said an investment banker in Washington, and pipeline for a “range of borrowers” is building for future years. So far, these deals have largely been executed for EM borrowers in bond market distress. Barbados, the Bahamas, Belize, Ecuador and Gabon have used them so far.