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Rare do-good loan in Asia flags chance of growth for tiny market

[SYDNEY] One of the first examples of so-called sustainability-linked loans in Asia-Pacific has stirred discussion about how the market in the region may grow, and catch up with such fund-raising elsewhere in the world.

An Australian unit of Singapore-based Frasers Property secured A$600 million (US$428 million) via a five-year syndicated loan late last month, in the first such deal signed Down Under. It's offering a margin of 135 basis points over the base rate, and that can drop by as much as 5 basis points from the second year if it keeps a top score on its sustainability performance - things like energy efficiency and recycling - from a consultancy, according to people familiar with the matter.

The market for sustainable finance has lagged in Asia due in part to reliance on coal in some countries, but it's been surging globally. For lenders, such deals allow them to get more environmentally and socially conscious assets on their balance sheets as they face regulatory and shareholder pressure to do so. For borrowers, loans tied to measurable sustainability metrics promise to reduce borrowing costs if targets are met.

Globally, sustainability-linked loans surged almost seven-fold in 2018 to US$34.7 billion, according to Bloomberg NEF. Such deals and green loans came to US$2.79 billion in Asia-Pacific last year, still tiny compared with the region's total syndicated loan volume of US$697 billion, Bloomberg-compiled data show. Green loans raise cash for specific environmental projects or assets, whereas sustainability loans let companies use the cash raised for anything they want covering a broader range of issues besides the environment such as social equality, governance and promoting health.

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"There increasingly will be lenders who are in this space and willing to incentivise their own customer base to accept lending on favorable terms for doing favorable activities," said Katharine Tapley, the head of sustainable finance at Australia & New Zealand Banking Group in Sydney.

The 135 basis-point margin on the latest Frasers deal compares with a spread of 150 basis points for its plain-vanilla loan in 2017 with the same tenor. It follows the company's green club loans of S$785 million (US$580 million) in March and S$1.2 billion in September.

"At the moment, most banks fund green loans at the same cost as their broader portfolio," said Andrew Ashman, Singapore-based head of loan syndicate for Asia-Pacific at Barclays Bank Plc, the underwriter for Frasers' latest deal. "Over time, there may be some capital relief or funding-cost benefit for green loans. That may encourage lenders to offer a larger pricing incentive for green finance."

While industry frameworks for green and sustainable loans were just introduced in 2018 and March this year, such deals are gaining traction. They are catching up with their bond counterparts, whose volume multiplied by over 60 times in the past five years and reached a record in 2018.

"We think that the green bond market will continue to grow in the exponential terms that it has over the recent five-year period," said ANZ's Tapley. "We also expect to see more labelled green loan transactions from borrowers, who aren't necessarily ready or don't have the need to go to the capital markets, but want to leverage their green-asset base to enter the sustainable-finance market," she said.

LOAN DEALS

BOCOM Leasing Management Hong Kong Co is marketing its maiden green loan of US$200 million.

Shipping company Nippon Yusen KK last month got its debut five-year green loan from Japanese lenders.

A unit of Singapore-based Sunseap Group Pte this month signed a S$50 million green loan for a portfolio of rooftop solar projects.

Australia's Adelaide Airport in December secured a A$50 million seven-year sustainability performance-linked loan based on Sustanalytics ratings.

Daiwa Office Investment Corp., a Japanese real estate investment trust, in March got three loan facilities totaling 6 billion yen (US$54 million) assessed for its efforts on ESG supported by Mitsubishi UFJ Research & Consulting Co and Japan Credit Rating Agency. 

Australia's Investa Commercial Property Fund in January closed a A$170 million green loan, tagged against Climate Bonds Initiative's CBI Low Carbon Building Criteria, requiring each asset under management to perform in the top 15 percent in their relative city in terms of carbon intensity

A China subsidiary of Credit Agricole Corporate & Investment Bank SA in December closed a fixed-asset green loan of 122 million yuan (US$18 million) to finance the Electricite de France Lingbao district project

"The real estate sector is a key beneficiary of green finance given the focus on improving energy efficiency of commercial office space," said Ashman at Barclays.

Loans linked to environmental, social and governance issues, or ESG, "work very well" for organisations that have an ambitious sustainability strategy but don't have a large amount of assets that green bonds or loans finance, said ANZ's Tapley.

"It's an important development for the market because it broadens out the application of sustainable finance instruments to a wider range of borrowers," she said.

BLOOMBERG