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Frasers unit's sustainability loan flags growth prospect for tiny market in Asia-Pac

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 fundraising elsewhere in the world.

An Australian unit of Singapore-based Frasers Property Ltd secured A$600 million (S$578 million) via a five-year syndicated loan late last month, in the first such deal signed Down Under.

It is offering a margin of 135 basis points over the base rate, and that can drop by as much as five 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.

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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 showed.

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.

"There increasingly will be lenders who are in this space and willing to incentivise their own customer base to accept lending on favourable terms for doing favourable 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 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, 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 Ms 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 added. BLOOMBERG