Europe embracing ‘sustainability-linked’ leveraged loans

Consistently dynamic, the European leveraged finance market is ever responsive to changing investor demographics. Whether credit protection provisions, ever-increasing sponsor muscle, legal developments, or lender management of risk, the market is rarely stagnant.  Lately, the market has been coerced into another state of change, increasing its focus by all market participants on environmental, social and governance factors (ESG). 

Going green

The urge to embrace ESG comes from both borrowers and sponsors as well as lenders. Borrowers and sponsors eager to attract a wider base of lenders and investors may profit from positive pricing metrics, positioning themselves firmly within the sustainability landscape. Lenders are looking for ESG metrics to appeal to their investor base in turn, to improve syndication and, as their counterparts are doing also, to position themselves well in the sustainability landscape.  The leveraged loan market is the perfect stage for sustainability-linked instruments – it is sector agnostic, avid for price incentives and fosters close relationships between borrower and lender.  

New products

In response to ESG pressure and wider socio-economic concerns, two distinct debt products have emerged. These are “green” instruments, the key feature of which is that the proceeds of the financing are used for “green” purposes, and “sustainability-linked” instruments where certain terms are tied to the issuer’s performance against pre-determined sustainability-linked key performance indicators (KPIs). While not a mainstay in most transactions, the latter products are becoming increasingly prominent in the leveraged finance space. 

Read: Europe embracing ‘sustainability-linked’ leveraged loans, Global Banking & Finance Review