Sockholm (NordSIP) – Following the publication of a its new Sustainability-Linked Loan (SLL) Framework at the end of the second quarter of 2022, Nordea issued a four-tranche bond worth €400 million tied to its portfolio of SLL €600 million.
To be clear, the transaction conducted by Nordea at the start of September is not a SLL, nor is it a Sustainability-linked bond. The cash flows from these bonds recently issued Nordea’s are in no way tied to any sort of goals and targets agreed between Nordea and the bond investors. However, the bond is tied to Nordea’s portolio of SLLs to corporates.
According to Nordea, “the new bond format is modelled closely after the so-called ‘use-of-proceeds’ structure that covers green bonds, where proceeds from the bonds are earmarked for specific green investments. In Nordea’s case, that could be green loans to clients for projects that are labelled ‘green.’ However, with this new bond format, the bond’s proceeds aren’t earmarked for green loans or assets but rather sustainability-linked loans.”
The transaction was divided into four tranches. The two tranches in SEK had a maturity of three years and were priced at 70 basis points (bps) over the 3-month STIBOR, equivalent to 70 bps over mid-swaps, in line with guidance. Books opened for the five-year NOK tranches with guidance of 110bps over the 3-month NIBOR. The SEK floating rate tranche had a final size of SEK 700million, while another SEK2.1 billion was issued in fixed rate bonds. The NOK floating rate tranche had a final size of NOK800million, while another NOK500 million was issued in fixed rate bonds.
What is a sustainability-linked loan?
Sustainability-linked loans are a type of lending arrangement where a company’s borrowing costs are tied to its progress on meeting certain set and measurable annual sustainability targets. If the company meets those key performance indicators (KPIs), it gets a discount on the interest paid; if not, it pays a premium.
Corporate interest in sustainability-linked loans has surged in recent years. Unlike green loans, where the financing must be used for specific green projects, the money from sustainability-linked loans can be used for general corporate purposes. But the interest terms of the loan give the borrower an incentive to meet certain pre-defined sustainability targets.
Nordea’s new Sustainability-linked Loan (SLL) Funding framework is believed to be the first of its kind. “We want to innovate and take part in moving the market forward,” says Jacob Michaelsen, Head of Sustainable Finance Advisory at Nordea. “This new framework builds on the successful development of the green bond market while also recognising the considerable momentum in the sustainability-linked loan market.”
Nordea’s Head of Bank Debt, Petra Mellor, described the “ESG friendly” framework as a “complement” to Nordea’s existing green funding framework. “We look forward to issuing more bonds in various formats and currencies in the future under both frameworks,” Mellor adds.
How Does Nordea’s bond Work?
Money from the bond is used to finance or refinance sustainability-linked loans that have been selected to be part of the SLL Funding asset pool. Loans in the pool must:
- Be aligned to the Sustainability-linked Bond Principles
- Contribute to combating climate change, for example through the reduction of greenhouse gas emissions or energy consumption
- Have key performance indicators (KPIs) and targets that are considered “material” and “ambitious” by an external reviewer
Once the suitable assets are identified, they are assessed by external provider ISS ESG, which also reviewed the funding framework. A cross-functional Nordea committee will regularly review the asset pool, and if a sustainability-linked loan no longer complies with the required criteria, for example by failing to meet a relevant target, it will be removed from the pool. Nordea will also report annually on the performance of the underlying companies and KPIs on an aggregated basis.
Why did Nordea develop this framework?
As the largest financial services group in the Nordic region, we are well positioned to support our customers in the transition to net zero. While the SLL Funding framework is not “green” per se, it is designed to cater for the transition assets not included in Nordea’s green bond asset portfolio, but that still have a strong alignment to ambitious sustainability goals.
“Green bonds and the use-of-proceeds structure focus on what you do with the money now. Sustainability-linked loan structures, which set targets into the future, are about transitioning,” says Jacob Michaelsen, Head of Nordea Sustainable Finance Advisory. “With this bond, we’re giving investors an opportunity to confirm that they’re actively supporting the companies in their transition,” Michaelsen adds.
Strong demand from investors
25 different accounts took part in the offering. According to Nordea, the dominating investor were Asset & Fund Managers in all four tranches, followed by Pension & Insurance companies in three out of the four tranches. Investors in the bond include AMF, Carnegie Fonder, Danske Invest, If Skadeförsäkring AB, Handelsbanken Fonder, Nordea Asset Management, SEB Investment Management, Simplicity, Storebrand Asset Management.
Helena Lindahl, Senior Portfolio Manager at Storebrand Asset Management, said Nordea has shown “great creativity by issuing the first bond backed by sustainability-linked loans, capturing a wider circle of sustainable lending which would not necessarily be captured by their issuance of green bonds, but is sustainable nonetheless. In order to ramp volumes up, we need to be innovative and creative. These are exactly the leadership values Nordea shows.”
Lisa Dohlvik, Portfolio Manager at AMF, noted that allocating capital to enable a transition to a more sustainable society is central to the green transition. “For us, it is important to influence in the right direction. Through Nordea’s sustainability-linked loans, companies get the opportunity to carry out a sustainable transition with the help of the financial markets,” Dohlvik concludes.