Chile further enhanced its standing as an ESG pioneer with a US$3bn multi-currency package of sustainability-linked bonds that marked the first sovereign SLB in euros and also the first to incorporate social targets.
For the Latin American country to avoid higher interest payments, the bonds require female board representation at all companies registered with Chile's Financial Market Commission to increase from 14% to 40% by 2031. Sustainalytics judged the target “highly ambitious”.
No gender or other social key performance indicators have been used in a sovereign bond offering previously. When Chile became the first sovereign to issue an SLB in March 2022 its KPIs addressed environmental goals, including absolute greenhouse gas emissions.
"We incorporated the gender KPI because it is a priority for the government and also because it is very important in the international sphere," said Patricio Sepulveda, head of the Chilean finance ministry's public debt office.
To make sure that the gender target is achieved, the ministry has sent a bill to Congress obligating companies to a schedule of gender targets in their boards that is expected to be voted into law at the end of 2023 or early 2024.
"The approval of the law is one of the main tools that we have to reach the target," Sepulveda said. "There is not much difference across the political spectrum of the importance of gender equality so I am very optimistic about the approval of this law."
The gender KPI’s addition confirmed the ambition to include social targets that Chile articulated last year. At the time, it was unable to find a measure with a sufficiently robust verification and adequate data history to meet the requirements of the Sustainability-Linked Bond Principles administered by the International Capital Market Association.
It resumed work on this in the first quarter and published its updated framework on Monday. Now it also hopes to incorporate additional KPIs, which could include a biodiversity target, according to Sepulveda.
Again, though, verification will be key and incorporation may not be achievable this year. “This is a long process ... But if we can, of course we will incorporate [the target],” Sepulveda said, noting the debt office is working on the issue with the environment ministry.
Sticky demand
Sepulveda said investor feedback about the updated SLB framework was "very good" when the deal's roadshow hit New York and London earlier this month.
Chile priced a US$1.15bn long 12-year SLB and a US$1.1bn long 30-year SLB on Tuesday, attracting subscription of nearly seven times. The €750m 11-year SLB, which printed on Wednesday, was four times subscribed.
A banker familiar with the trades said the US dollar portion came with negative 7bp new issue concession; for the euro deal it was minus 2bp.
"It's good to see that premium ESG deals are still getting that kind of greenium support," said another banker. "It's a sign that the demand is clear and the investors are sticky – they really believe in what the issuer is doing and support it."
Demand was rather higher for the US dollar portion. But Chile wanted to issue in euros to establish an SLB presence in the European market, a feat it attempted in February last year only to be sidelined by the volatility triggered by Russia's invasion of Ukraine, Sepulveda said. He said the tranche attracted €3bn of demand from high-quality investors.
"The euro is very important because in Europe the sensitivity to ESG instruments is very high," he said. "That's the reason that we access euros and we would like to continue with this diversification of issuance in foreign currency markets.”
The 4.125% 11-year euro SLB priced at 128bp over mid-swaps. Price thoughts opened at 155bp area.
In US dollars, the 4.95% 12-year SLB and 5.33% 30-year SLB priced to yield Treasuries plus 123bp and plus 148bp, respectively. Initial price thoughts were 160bp and 185bp areas.
Credit Agricole, HSBC, Santander, Scotiabank and Societe Generale led the transactions.
Going greener
The new bonds moved the ESG portion of the country's debt stock to around 32%–33% from around 31%, according to the banker. "The strategy to increase the share of sustainable debt is commendable," said Viktor Szabo, an investment director on the emerging markets debt team at abrdn.
The portion of ESG debt will increase further with an exchange offer launched on Wednesday that is giving bondholders the opportunity to exchange euro notes maturing between 2025 and 2030 for new 4.125% 11-year euro SLBs. It has also offered to exchange US dollar notes maturing between 2025 and 2047 for new 4.95% 12-year and 5.33% 30-year dollar SLBs. The offers expire on July 6.
The sovereign could exchange up to US$6bn, according to the banker.
These deals might be the last foreign currency bonds from Chile this year. The country is aiming to reduce the proportion of foreign currency debt to 20% from 35%, and has no plans to issue more internationally this year, according to the banker.
Rather, it intends to issue US$12bn-equivalent in the local market, with SLBs and social bonds set to contribute as much as US$7bn, according to the sovereign's investor presentation.
Local offerings will be tilted to ESG formats because government policy is to move in that direction, Sepulveda said.