Seafood producer Thai Union Group met the targets for its sustainability-linked bonds, triggering what is thought to be the first SLB stepdown globally, just as Thailand considers a similar structure for what would be the first sovereign issue of the instrument outside Latin America.
By meeting the KPIs around sustainability and emission reductions in its 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 stepdown features linked to 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/stepdown 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 it could come as early as September but said the plan has not yet been confirmed.
The transaction has not been officially announced but a finance ministry 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 factor behind the state's plan to issue an SLB, and noted it had previously been held back from doing so by the limited number of projects for which it could use the proceeds.
"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 have been 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 next year 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 such as 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 penalties or rewards when KPIs are missed or met. Anthropocene Fixed Income Institute said Thai Union may be the first issuer to have benefited from a stepdown for a bond, although this is common in the sustainability-linked loan market.
Jamjun Siriganjanavong, head of debt capital markets and the ESG finance department at Bank of Ayudhya, which worked on Thai Union’s trade, noted that the stepdown 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 anchor investors rather than the broader market, she said.
It has proven difficult to find the right balance in SLBs between rewarding and penalising issuers, whether investors should be rewarded with a step-up if a sustainable goal is not met or whether they should face a lower coupon if a KPI is met but the issuer’s risk has not changed.
“To decide between step-up and stepdown, we still need to give the market some time,” said Hazel Ilango, research associate for the Asia-Pacific at AFII. Ilango suggested a higher coupon at pricing could help compensate investors for a possible lower future return if a stepdown is enacted, although she said that would be less appealing to issuers.
In the case of Thai Union, there was debate about the step-up or stepdown amount. Siriganjanavong said the issuer needed to create a balanced incentive and penalty structure that would benefit the company and its investors. 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% of its tuna suppliers' vessels with electronic monitoring and/or human observers to ensure sustainable fishing by 2023 and all their vessels 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 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 said SLBs are still developing. “One should not be overly surprised that there are tuning difficulties," she said.
AFII looked at 24 bonds issued by 19 companies in several 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 provides more transparency. She argued that even with 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, said that government directions, such as specific emission 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 at the end of June from Sabana Industrial REIT and the first rupiah 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 defaults.
“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.
Thai Union’s Setthawiwat said his company faced difficulties 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 it 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.
“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