New frontiers
Italian utility Enel took a chance in the Yankee market and ultimately prevailed when it issued the first ever sustainable development goals-linked bond, offering an alternative to green bonds and opening the way for a broader set of borrowers to tap the burgeoning ESG space.
In a Yankee market that was overshadowed somewhat by a surge of issuance in euros, Enel’s bond stood out for its innovation in an asset class that saw a surge in interest among US dollar investors and borrowers in 2019.
Stepping away from conventional green bond issuance, the utility chose an arguably more controversial path to polishing its sustainability credentials among fixed income investors.
While proceeds could be used for general corporate purposes, the five-year bond’s structure put Enel’s feet to the fire with regards to its sustainability goals by containing a coupon that steps up by 25bp should its renewable installed capacity is below 55% of its power mix by the end of 2021.
“It is a general corporate purposes bond and it is explicitly not a green bond, and was never intended to be,” said one banker.
“The target is closely linked to the UN’s Sustainable Development Goal seven on clean energy. It is a first-of-its-kind transaction and opens up the ESG-themed financing market more broadly to issuers that have struggled to access the green bond market.”
Bankers carried out extensive investor work ahead of the transaction, garnering feedback on what was the best SDG metric to make it valuable in the eyes of investors with dedicated green and sustainable portfolios.
“It was ambitious enough that it gave some real teeth to the structure and the covenant, and it is something [Enel] will have to work hard to achieve over the next two years,” said John Sales, managing director on the fixed income syndicate desk at Goldman Sachs.
Goldman Sachs was an active bookrunner along with Bank of America, BNP Paribas, Citigroup, Credit Agricole, JP Morgan, Morgan Stanley and Societe Generale.
An order book that peaked at US$4bn showed investors were on board with the idea, allowing leads to tighten pricing by 25bp from start to finish before landing the US$1.5bn five-year at a yield of 2.676%, or 125bp over Treasuries.
At that level, bankers on the deal estimated it came some 10bp inside fair value, lending credence to the argument that ESG deals are finally seeing price advantages over more plain vanilla offerings.
“There is some probability that the bond can step up and therefore they achieve some savings upfront,” said Gaurav Mathur, managing director in the investment banking division at Goldman Sachs.
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