Key themes

• In line with broader market moves, recent spread-widening has not spared some segments of the SLB market which saw an inflection in sales for bonds issued in EUR, GBP and USD totalling only EUR 10.7bn (Q2 2022) compared to EUR 25.1bn at the end of Q1 2022 (NatWest, Bloomberg). This is, in part, explained by a comparatively less favourable backdrop for high-yield issuers and the increased focus from investors on lowering their portfolios’ duration, thus favouring shorter-dated papers.
• As a result, SLBs, which by their nature have been used as long-term transition tools (average tenor 8yr), were arguably more complex to structure in Q2. Nonetheless, some companies are taking note and rather than including just a handful of milestone years (e.g. typically 2025 and 2030), have introduced annualised targets in their frameworks in what we call a “satnav approach” which provides extra flexibility to match the exact corporate financing needs.
• While the uncertain macroeconomic backdrop stifled issuances across some sectors (notably Industrials & Materials and Consumers), Energy & Utilities companies were not shy in tapping the SLB market in Q2 with sales (EUR 6.6bn) well above the quarterly sector average of EUR 5.5bn observed since Q1 2021. Growth was mainly driven by repeat issuers (e.g. Enel and Gasunie) who were able to access pockets of demand as investors deployed their cash for the right structures / names.
• Some interesting inaugural transactions were also launched over the last quarter. For example, in the Telecom space TDC Net sold an SLB linked to Scope 1 & 2 and Scope 3 (the second SLB issuance in the euro market following KPN), while Deere & Co launched the first SLB in the Agricultural Machinery sector and only the fifth issuance in the broader machinery / equipment sector. The increasing appeal to the transitioning sectors (which may be less suitable for green bond issuers) was further evidenced by HeidelbergCement’s announcement of its new Sustainability-Linked Financing Framework; bringing another Construction Materials company to the fore in this market.
• As mentioned in previous notes, Science Based Targets remains the most preferred method to validate greenhouse gas (“GHG”) emissions reduction plans with 64% of all environmentally-focused SLBs obtaining Science Based Targets initiative (“SBTi”) certification. This trend is expected to continue as a record number of almost 1,200 companies have either set or committed to setting SBTi-aligned targets this year, thus loading the pipeline of potential SLB issuers for the coming months.
• Scope 3 emissions remain front and centre on investor roadshows, as discussed on a recent NatWest webinar. At the end of the last quarter 22% of instruments with environmental Key Performance Indicators (“KPI”) included indirect emissions in their structures compared to only 14% at the end of Q2 2021 – a clear sign that companies have been receptive to the topic. Moreover, several alternatives to full Scope 3 KPIs exist as evidenced by a growing number of securities linked to KPIs other than pure GHG emissions, for example reduction of use of non-recyclable products, increase in recovered products and increase in electric vehicles used.
• Structurally, SLBs continued their evolution over the last quarter. For the first time SLBs with multiple KPIs (2 or 3) exceeded the number of those linked to 1 metric only (59% vs 41%) suggesting that the concept of “core” and “secondary” KPIs is well understood in the market – see also the recent guidance from the International Capital Market Association (“ICMA”) on this topic. Interestingly, primary market data highlights how a higher number of KPIs can lead to higher oversubscription levels, suggesting some investors may prefer a company setting several ESG targets i.e. being held accountable across multiple dimensions.
• It has now been two years since ICMA published its SLB Principles and, looking ahead, this asset class is expected to continue to offer an attractive solution for corporates and sovereigns looking to embed sustainability in their capital structure. To find out more on this, do check-out our discussion The SLB Market is 2 years old: What is next for this asset class.
   

I. Supply Dynamics

Supply amount issued EUR bn equivalent

Split by geography: total market

Split by Sector

Split by Rating

II. Structural features

KPI features

KPI categories: % change Q2 2022 vs. Q1 2022

Number of KPIs

III. Sustainability Performance Target (“SPT”) features

Split by SBTi Commitment [1]

Target year as a % of overall tenor

IV. Economics

SPT driven adjustment to debt instrument

Margin adjustment as a % of at-issue credit spread [2]

Total cumulative penalty split, Q2 2022

Average cumulative penalty, historical

V. Primary Markets

Average oversubscription – EUR

Average oversubscription – USD

[1] Representative of deals with at least 1 Environmental KPIs

[2] Coupon step-up adjustment (bps)/Issue spread to benchmark (mid-swap spread for EUR, Gilt spread for GBP and T spread for USD)