Seafood producer Thai Union Group met the targets for its sustainability-linked bonds, triggering what is thought to be the first SLB step-down globally, as the Kingdom of Thailand considers a similar structure for what would be the first sovereign issue of the instruments outside Latin America.
By meeting the key performance indicators around sustainability and emission reductions in its Thai baht-denominated SLB, Thai Union triggered a coupon reduction of 10bp.
Thai Union’s seven-year bond, sold in 2021 at 2.47%, was novel when it came out, as it was one of the first SLBs in Asia, as well as the first globally to have both step-up and step-down features linked to the KPIs. The deal proved popular and was upsized to Bt5bn (US$152m at the time), but it required a great amount of preliminary legwork.
“The product was quite new to the market, so we needed the market, the investors and regulators,” said Yongyut Setthawiwat, managing director for treasury and finance shared services at Thai Union. “The demand at first was not really that high, but luckily we had an anchor investor.” Thai Union did not disclose the name of the anchor investor.
Thai Union followed the deal up quickly, just four months later selling a Bt6bn SLB split between a 2.27% five-year and a 3.36% 10-year.
The Thai sovereign is hoping to replicate the structure and is eyeing its own step-up/step-down baht-denominated SLB sale in the near future, sources told IFR. It has previously sold sustainability bonds denominated in baht, but this would be the first sovereign sustainability-linked bond sale. Thailand's finance ministry did not respond to a request for comment.
A banker on the deal estimated the deal could come as early as September, but said the plan has not been confirmed yet.
The transaction has not been officially announced, but a ministry of finance official discussed the plan in a media interview in May.
The banks involved in the deal are Bangkok Bank, Krungthai Bank, Standard Chartered and Krungsri Bank, according to a source.
The banker cited "market innovation" as one of the factors behind the state's plan to issue an SLB, and noted that it had previously been held back from doing so by the limited number of projects that it could use the proceeds for.
"The use of proceeds' limits are quite inflexible for Thailand," he said.
Case study
Thai Union, as one of the first SLB issuers, provides a case study for other issuers considering similar deals. Issuance of SLBs, which are touted for their potential and the flexibility they give issuers for the use of proceeds, stalled last year as new European standards made issuers and investors think more carefully about whether KPIs in such bonds were ambitious enough.
But Thai Union could be back in the market with another SLB as soon as 2025 to meet its refinancing needs, Setthawiwat said, noting that the instrument drives strong investor demand.
“We wanted to communicate this achievement and effort to the financial community,” said Setthawiwat of Thai Union’s sustainability journey. Use of proceeds bonds, like green bonds, did not fit the company’s requirements, he said, as it needed to fund several different projects.
“When the sustainability-linked bond came to the market, we saw exactly what we wanted, and it fit our requirement,” said Setthawiwat. “With this, we believe we can attract a pool of new investors who focus on sustainability.”
Stepdown structures
SLBs still vary in structure, with issuers opting for different kinds of penalties or rewards when KPIs are met. Anthropocene Fixed Income Institute believes Thai Union may be the first issuer to have benefited from a step-down for such a bond, although this is common in the sustainability-linked loan market.
Jamjun Siriganjanavong, head of debt capital markets and ESG finance department at Bank of Ayudhya, which worked on Thai Union’s trade, noted that the step-down structure is widely accepted for SLLs, but it was a harder sell for bond investors, which is part of the reason Thai Union added a step-up feature. A lot of investor work was done to explain international standards and SLLs, with conversations targeting key anchor Thai Union investors rather than the broad market, she said.
The complexity of SLBs can sometimes detract from investor demand. One Hong Kong-based lawyer noted that a Chinese corporate borrower he worked with had contemplated an SLB last year, but was discouraged by bankers who wanted to keep the deal simple to ensure investors bought in.
“It sounds like a good sell, but is it going to distract from the main deal?” the lawyer said.
It has proven difficult to find the right balance in SLBs between rewarding and penalising issuers. For instance, should investors be rewarded with a step-up if a sustainable goal is not met? Or should investors face a lower coupon if a KPI is met, but the issuer’s risk has not changed?
“To decide between step-up and step-down, we still need to give the market some time,” said Hazel Ilango, research associate for APAC at AFII. Ilango suggested that a higher coupon at pricing could help compensate investors for a possible lower future return if a step-down is enacted, although she noted that this would be less appealing to issuers.
In the case of Thai Union, there was debate about the step-up or down amount. Siriganjanavong said the issuer needed to create a balanced incentive and penalty structure that would benefit the company and its investors. The price discovery found that a 10bp adjustment was the sweet spot.
Understanding KPIs
Investors and issuers need to agree on KPIs that are achievable, but also ambitious enough to drive real change. In Thai Union’s case, three KPIs were outlined in its 2021 SLBs: maintaining the company’s high score in the Dow Jones Sustainability Indices, a reduction in greenhouse gas emissions in its manufacturing facilities to 0.64 tonnes of carbon dioxide per tonne of finished goods in 2023 and 0.56 in 2026 from 0.71 in 2019, and to equip 90% all vessels of its tuna suppliers with electronic monitoring and/or human observers to ensure sustainable fishing by 2023 and 100% by 2026.
“We got very challenging questions, especially from the second-party opinion providers,” said Setthawiwat, adding that the tuna-related KPIs in particular needed further explanation.
Ilango said that strong KPIs need to be “an ambitious target that is beyond your business as usual”. In the case of Thai Union, the first KPI, while laudable, may not be ambitious, given that it is about maintaining a certain standard, rather than pushing for new inclusion, AFII said. The second KPI is more in line with market expectations, but the third KPI related to the boats is difficult to gauge as ambitious or meaningful given the lack of comparable industry standards.
Ilango noted that SLBs are still developing. “One should not be overly surprised that there are tuning difficulties," she said.
For AFII, measuring KPIs involves checking periodic reporting from companies, analysing trends and tracking capital expenditure. The group looked at 24 bonds issued by 19 companies in a variety of sectors with KPI observation dates in 2024. By its July estimates, three of the bonds are likely to miss their targets, and another four are at risk of missing them.
Ilango said one of the best aspects of SLBs is that regular reporting is required, which gives investors more transparency. She argued that even in the cases of poorly structured SLBs, the reporting commitments for companies signal commitment, give transparency and open dialogue.
“It’s not easy at all,” said Setthawiwat of the KPI tracking. “For greenhouse gases, we need to do so many things just to make sure that the number we get is the correct one.”
Joseph Park, principal investment specialist at Credit Guarantee and Investment Facility, suggested that government directions, such as specific emissions goals for the country and related regulations, can be used by bond issuers to help establish KPIs.
CGIF has guaranteed two SLBs, a Singapore dollar deal from Sabana Industrial REIT at the end of June and the first rupiah-denominated SLB from Steel Pipe Industry of Indonesia in July. As an outside guarantor, CGIF has no say in setting KPIs, although it would be on the hook for any coupon changes to notes if an issuer were to default.
“KPIs are often not easy to set in terms of measurability and accountability,” said Park. Government involvement could also be helpful in nascent markets like Indonesia, where investors are still getting to grips with SLBs and it is difficult for investors to gauge whether the KPIs are appropriate or not.
Thai Union’s Setthawiwat explained his company faced steep challenges in establishing KPIs, despite having already done internal sustainability work.
“The challenge at the beginning was that we didn’t know what would be the best [data points],” said Setthawiwat, explaining that its used estimates as starting points. “But when we needed to do the actual counting, we found that the number is much lower than we estimated, so it was only a starting point and we failed compared to what we estimated.”
Before it sold its SLB, Thai Union had already been vocal about its sustainability efforts and had reviewed its greenhouse gas emissions. It recognises that it SLBs would not be an easy sell for a company that was not already actively looking at sustainability.
“We believe sustainability is no longer just an option,” said Setthawiwat. “If you don’t do this kind of activity, that access to the pool of financing will become more and more limited.”
(Additional reporting by Hui Ting Yong.)
Corrected story: Clarifies that Thailand issue would be first sovereign SLB outside Latin America