RGE closes US$550 million sustainability-linked derivative with MUFG

ROYAL Golden Eagle (RGE) has closed its sustainability-linked derivative (SLD) with MUFG Bank, a first for both the pulp, paper and palm oil giant, as well as the financial institution.

The US$550 million SLD would allow RGE’s member company Apical, a vegetable oil processor, to partially hedge the interest rate risk of US$787 million of sustainability-linked loans (SLL) it secured in November last year.

This means that Apical would be able to fix its interest rate for US$550 million of its loan for a period of two years, amid a rising rate environment.

Similar to other sustainability-linked financial products, corporates that take up SLDs have to pay a higher rate if it does not meet their pre-defined sustainability key performance indicators (KPIs).

Having an SLD tagged to its SLL means RGE could face a double whammy if it fails to meet its sustainability targets. This is because they would not only have to pay a higher rate on their SLLs, but also face a step-up rate for this SLD.

RGE’s KPIs include raising the level of verified traceability to its plantations, increasing engagement of suppliers to promote sustainable practices and traceability, increasing the number of Roundtable on Sustainable Palm Oil certifications among smallholder farmers, and reducing greenhouse gas emissions through methane-capture facilities.

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Tey Wei Lin, president of RGE, said the company opted for this financing tool, which imposes a second penalty if they do not meet their targets, because “it facilitates an even greater level of accountability from (them)”.

“We are confident that we will deliver on our commitments. Sustainability is at the core of our business, and it has to be a company-wide effort. The SLD helps to further align our teams across the company to deliver on our targets, while hedging our interest rate exposure,” Tey said in response to queries from The Business Times (BT).

However, unlike sustainability-linked loans and bonds, where borrowers and issuers benefit from lower interest or coupon rates for meeting their sustainability targets, RGE’s SLD is structured such that there are no step-down rates even if they do so.

While there may not be a direct commercial benefit from taking up SLDs, MUFG’s Nick Yee told BT that companies may experience a boost in their reputation on environmental, social and governance (ESG) factors, as banks would view such clients as being very committed to their sustainability KPIs. He noted, however, that the bank is able to structure SLDs with the step-down rate feature for clients who prefer such options.

Yee is the managing director and head of global client solutions sales for Asean, Indian and Oceania.

He said that SLDs are still a very new financing tool, and many corporate clients in Asia are not aware of it. While the bank is seeing more interest among clients in taking up interest rate swaps due to the rising rate environment, a majority of these are not SLDs, even among corporates with SLLs.

The bank was not able to provide the number of corporates in Asia that have taken up SLDs, given its nascency. However, Yee expects interest in SLDs to grow.

Companies that took out a non-SLL years ago and are still servicing it, can tie sustainability targets to their funding by tagging them to a standalone SLD, for example.

Jonathan Ne Win, vice-president for Asia-Pacific ESG finance at MUFG, said the bank had looked into the market development for SLDs and thought that adding this new ESG financing instrument to its suite of products would build on the work it had done in SLLs and sustainability-linked bonds, and enable it to stay more relevant to clients.