Sustainable Junk

January 2021 Wrap 

By Josh Latham (

At 9fin we actively monitor ESG related newsflow for Leverage Finance issuers.

Reproduced below is an abridged version of our monthly report:

Asset managers are under increased pressure from their clients and regulators to pursue more sustainable and environmentally responsible investment strategies.

This trend looks set to continue in the next few years, with Cerulli Associates estimating that 35-50% of global assets will be managed under ESG principles by 2025. Is it outside the realms of possibility that the next decade could see ESG related investments becoming the vast majority of issuance? Perhaps ‘dirty’ bonds will be transformed into a niche asset class.

Several recent ‘blowout’ deals for ESG-linked or Green bond transactions for LevFin borrowers suggest demand for ESG compliant issuance may be outstripping supply further down the credit curve. 

Investment-grade issuance in Europe, excluding public sector borrowers and financials, stood at €14.8 billion as of 23 October, 2020. Green HY issuance unsurprisingly lagged behind, with a total of €2.72 billion issued last year according to our data.

This has ultimately left hungry investors competing for a slice of the action. Volvo Cars 2027 Senior Notes issued in October saw its order books five-times oversubscribed, whilst Unipol Gruppo’s €750m 10-year green refinancing deal issued a month earlier attracted just below €3bn in orders, illustrating strong market demand for green investment products. 

Although primary ESG issuance is a drop in the ocean compared to the wider LevFin market, it is important to observe the exponential growth in this space. We have already seen green issuance across a range of sub-investment grade debt classes surpass the €4.5bn mark in January alone, with a strong trend found in sustainability-linked loans. Our consolidated list of sustainable and green bonds for 2017 to 2020 is available on 9fin.

New Year’s Responsible Resolutions

Telecom Italia (TIM) became the first green HY borrower of 2021, debuting in the market with €1bn of Senior Notes. The eight-year financing attracted over €2.8bn euros from ~350 accounts. 

The purpose of the notes was to increase the group’s energy efficiency (through transforming their copper network into fibre) and the financing of eligible Green and Social Projects highlighted in their Sustainability Framework

Original IPTs of 2.25% tightened to pricing of 1.625% (with 99.074 OID), providing the group with its lowest coupon ever, coming in at half their average cost of debt. The relative value graph below illustrates the cost savings achieved.

Bonds aren’t the only instrument being tapped for green purposes. Sustainability-linked loans (SLL) have also increased in popularity among issuers. 

In mid-January we caught wind of a sustainability-linked buyout loan funding Carlyle’s €2bn purchase of Flender. The company, which supplies gearboxes, generators and services for wind turbines, introduced a green element to it’s €965m TLB. The margin ratchet has the ability to move rates up or down by 10bps depending on the installed amount of wind power. Flender has generously agreed to pass half its savings on interest payments to charity.

Carlyle group isn’t shy of introducing ESG-linked debt into the leverage loan space. In June, Carlyle-backed plastic packing company Logoplaste issued €570m worth of leverage loans, becoming the first ESG-linked loan to test Europe’s institutional investor base.

Kloeckner Pentaplast packaged an ESG-linked margin ratchet into their €1.175bn dual-currency term loan refinancing deal earlier this week. This is the latest sustainability-linked term loan B which links annual performance of pre-agreed ESG criteria to an independent ratchet. There are three KPIs; scope 1 & 2 greenhouse gas emissions, the percentage of post-consumer recycled content packaging and women in management - each have the ability to reduce rates by 2.5bp.

9fin’s ESG Highlights

Of course, ESG is much broader than just the environment, the first letter of the moniker. 

9fin’s ESG filter has brought to light some important social and governance related news in recent months which are worth highlighting:

Attractive borrowing costs and greater transparency may persuade issuers to set new records in the green high-yield space this year. However, retaining investors' trust remains a key market challenge.  With accusations of “greenwashing” circulating It is encouraging to see so many initiatives being set to tackle this problem.