Yunnan Provincial Energy Investment Group became the first Asian issuer to sell an international bond with both green and sustainability-linked status, helping it attract interest in a challenging market.
Despite some caution from investors, the Chinese hydropower, thermal and alternative energy company priced its US$230m 5.3% three-year bond on Wednesday at 99.454 to yield 5.5%, inside initial guidance of 6% area.
The order book reached just US$410m, including US$210m from the leads, when the final price guidance was announced. Final deal statistics were not released.
The final price reflects fair value, said a banker on the transaction. Investor feedback had ranged from the low-5% to high-5% areas, with some investors adjusting their price thoughts during the day due to choppy market conditions.
Proceeds will be used to refinance offshore debt that is related to green projects, while the sustainability-linked aspect gives the notes a coupon step-up if the issuer misses targets to increase its wind and solar power generation capacity.
The coupon will step up by 15bp if the company does not increase wind generation capacity by 173% by December 2023, compared with a benchmark at the end of 2021, and by 10bp if it does not increase solar power by 43% within the same timeframe. The reporting date is June 30 2024, with the interest payment going into effect on October 22 2024.
Yunnan Provincial Energy is not the first to combine the green and sustainability-linked structures into one deal. The first widely marketed deal came in March 2021 from Austrian electricity company Verbund, which sold a €500m (US$545m) 20-year note with a green use of proceeds and a step-up pegged to its goal of increasing renewable energy capacity.
The idea is that the combined structure allows the notes to more easily fall into dedicated green investment funds than a straight SLB. Some investors are still uncomfortable with the SLB step-up structure, since investors benefit from a borrower's failure to meet its green goals.
Many issuers can get either a green deal or SLB trade done without needing another label, said Luying Gan, head of sustainable bonds for debt capital markets in Asia Pacific at HSBC, and the amount of work required can deter them from pursuing a second label.
But the structure works well for borrowers like Yunnan Provincial Energy, which has fossil fuel exposure and needs to communicate its transition strategy.
"There could be investor concerns about how they are embarking on the transition journey," said Gan. "The issuer would like to use the double-ESG structure to amplify their transition plan and strategy."
Gan believes the use of a dual label allowed the issuer to sell an international bond in an otherwise difficult market, and attract international investor interest, something that is rare for a Chinese LGFV deal.
The green participation was still limited to three or four investors, as the three-year tenor was too short for some international green investors and others were priced out of the deal. The short tenor also compresses the time frame for the SLB, leaving the issuer less than two years to meet its KPIs and just one coupon payment before maturity to pay the step-up should the KPIs not be met.
"We hope this is a structure that would be replicable by other issuers as well," said Gan, adding that it will help borrowers that are otherwise working on transition plans to communicate them to the market.
A sustainability banker away from the Yunnan Provincial Energy trade said that the structure is interesting, but will not be suitable for many issuers.
"I just don't see why you need to come to the market with both commitments," said the sustainability banker. She reckoned that the borrower may have been trying for a "bullet-proof trade" given that its tenor is short and changes to its energy transition will be limited in just three years. The doubling up may demonstrate a real commitment to transition for investors, she said.
Yunnan Provincial Energy faced some additional hurdles with investors. The company is more than 90% indirectly owned by the Yunnan State-owned Assets Supervision and Administration Commission, so some buyers saw the name as a local government financing vehicle, while others saw it as a state-owned enterprise.
The company is the sole provincial energy vehicle in China's southern province of Yunnan, which has weaker financial strength than many other provinces.
HSBC, Guotai Junan International and Industrial Bank Hong Kong branch were global coordinators. They were also the bookrunners and lead managers with China Industrial Capital Corp, CLSA and Hua Xia Bank Hong Kong branch. HSBC was the sole green structuring bank.
Bank of East Asia was dropped from the bookrunner list during the day.
Yunnan Energy Investment Overseas Financial Co will issue the Reg S notes with a guarantee by Yunnan Provincial Energy. The notes will be rated BBB– by Fitch in line with the guarantor.
Fixes typo