Conventional thinking: Enel moves on from SLBs
Enel has sold its first senior conventional bond in six years in a major shift in strategy that will see the Italian utility turn its back on the sustainability-linked bond format it had pioneered.
The energy giant is by far the most significant issuer in the SLB market having raised €34bn in the format – a 10% market share – and has been a strong advocate for the instrument and asset class.
Sources close to its new deal – a US$4.5bn multi-tranche bond – confirmed that Enel will no longer issue SLBs or any other labelled debt.
That news raises questions about the future of the SLB market, where volume has plunged since 2021’s peak, and will come as a blow to the remaining supporters of a product that ties issuers’ financing costs directly to their progress in transitioning towards net zero.
The sources close to the deal said the decision was not a result of the company backtracking on its climate commitments, arguing that the move to only issue conventional bonds is proof that the SLB market has done its job. Instead, they said, the move should be interpreted as a sign of success.
"The SLB instrument has worked well. It has been a valuable tool to support and accelerate Enel's transition," one source said. "Enel is a sustainable company in its core business, it has made significant progress in its transition and has the numbers to back that up. It does not need labels to validate its commitment to sustainability because investors recognise that sustainability is embedded in Enel's strategy."
Enel said renewables make up 73% of its total capacity compared with 41% in 2015, while 83% of the energy generated by the group has zero emissions compared with 45% in 2015.
It attributed those results to the use of sustainability-linked instruments, which it said "achieved the objective for which they were introduced".
"As a result, the group no longer needs to resort to financial instruments linked to specific sustainability targets and will adopt an approach that will allow efficient access to global financial markets, continuing to align funding methods with its long-term sustainability objectives towards net-zero emissions, both direct and indirect, by 2040," Enel said.
The non-profit Anthropocene Fixed Income Institute welcomed Enel's statement that SLBs have helped achieve its transition to date. "It is a very positive result if Enel feels that through the market viewing it as a strongly sustainable company, this feeds through into a tighter cost of capital for all its debt," said Jo Richardson, AFII's head of research.
Despite the pushback on action to address climate change in the US, the sources said Enel's decision to drop sustainability labels while tapping the US dollar market is unrelated and that the company would issue conventional debt in other currencies, including euros.
SLB godfather
Enel has been a trailblazer for the market since issuing the first SLB in 2019 and has printed only SLBs since then. The company was closely involved in the creation of ICMA's Sustainability-Linked Bond Principles and Enel's head of finance and insurance, Alessandro Canta, has been an advocate for the instrument.
Enel's issuance of SLBs has been a core part of the communication of its sustainability strategy and the progress of its transition and it has set an example that many corporates have followed.
More than US$268bn of SLBs have been issued since Enel's debut, according to LSEG data, as more companies publicly align their borrowing and sustainability strategies.
Annual SLB issuance peaked in 2021 at US$91bn as high-emitting companies used SLBs as an early transition tool to decarbonise. However, only US$15.36bn of SLBs have been issued this year as the asset class continues to see lower supply and many companies face their first tests of sustainability performance targets.
"[Enel's move away from SLB issuance] will have quite a material impact, certainly in the short term, on the depth of the sustainability-linked bond market. This market is going through an interesting evolution anyway with ... less of an upward trajectory of supply than was forecast a couple of years ago," said Arthur Krebbers, managing director of sustainable finance advisory at NatWest.
Enel famously missed one of its SLB key performance indictor targets in April 2024, due to "unprecedented circumstances", after the Italian government increased coal-fired power generation due to the energy crisis after Russia's invasion of Ukraine and the company paid a 25bp step-up that generated a payment estimated at around €83m. Enel's payment was applauded as adding credibility to sustainability-linked debt.
The sources said the payment of the coupon step-up was not related to Enel's decision to move back to issuing conventional debt.
Rousing response
The rousing response to Enel's conventional US dollar bond suggests investors are buying the argument that Enel is now a fully sustainable company – with the sources saying that all Enel's core ESG fixed income investors that bought its SLBs regularly over the years participated in the transaction.
Enel priced the US$4.5bn multi-tranche bond on Tuesday via BNP Paribas, Goldman Sachs and JP Morgan. The issue, split into maturities of three, five, 10 and 30 years, was three times subscribed with books of US$14.4bn. The company said the deal is the largest bond offering this year from a European utility.
IFR calculations suggest the bonds came very tight, with no (or even negative) new issue concessions, although whether that was a result of a market desperate for new paper, or whether investors were convinced by Enel's transition story (or a bit of both) is difficult to say.
“Enel’s decision points to a natural evolution of their own transition journey, bringing accountability of their sustainable strategy to company level," said Giulio Baratta, co-head of global investment-grade finance at BNPP.
"The transaction attracted the biggest investor book for their US dollar issuances, with investor sentiment understanding the clear rationale of the company’s transition, sustainability credentials and outstanding commitments to decarbonisation based on their existing SLBs.”