SocGen supports Chile to continue blazing its sustainability trail

In 2019, Chile had the distinction of launching the first green sovereign bond in the Americas. Now it has issued the world’s first sustainability-linked sovereign bond. Société Générale (SocGen) was one of three French banks to act as active bookrunners and joint sustainability structuring advisers.

SocGen is not exactly a stranger to Chile. “We have been here since the mid-1990s,” observes Paul Miquel, the bank’s Santiago-based country head of Chile, Peru and Colombia. “We have always been active in the energy, mining and infrastructure sectors, with some capital markets activity.”

Mr Miquel notes that in recent years, the Chilean financial authorities have shown particular concern about the need for climate action. Felipe Larraín, minister of finance under former president Sebastián Piñera, was a founder and co-leader of the Coalition of Finance Ministers for Climate Action in 2018. The forum now has more than 50 member countries.

Strong conviction

That level of conviction drove Chile to became the first American sovereign to issue a green bond. SocGen was an active bookrunner on the June 2019 transaction, together with Crédit Agricole and JPMorgan.

At the time, Chile chose to issue in euros, given the critical mass of socially responsible investors to the east of the Atlantic. That proved to be a smart move, as it was able to achieve the lowest coupon in its history of euro issuance.

The 12-year senior secured green bond paid a coupon of 0.83% and raised €861m. The share of the issue taken by European investors represented more than 85% of accounts, and the final pricing level marked a negative new issue concession of 5 basis points (bps).

At the end of 2019, Chile underscored its green credentials by being, officially, the host nation for the 25th UN Climate Change Conference (COP25), though the gathering physically took place in Madrid.

SocGen was an active bookrunner, with BNP Paribas and Santander, when Chile returned to market in January 2020 to tap the green 12-year and issue a new 20-year green bond in a simultaneous transaction that raised €1.962bn.

The new 20-year issue had a 1.25% coupon. Alongside it, the sovereign also executed its first-ever euro liability management transaction, using an intraday switch offer to refinance €469m of its outstanding 2025–2030 notes.

Sustainability

It was towards the end of 2021 that Chile began talking to bankers about building on these foundations and issuing a sustainability-linked bond (SLB). “The Ministry of Finance wanted to do something more concrete in terms of impact,” Mr Miquel says. “They started to think about doing an SLB this year and were convinced that there was a space for it.”

SocGen has an impeccable record when it comes to sustainability-linked finance. It was a joint bookrunner on the first-ever corporate SLB, a $1.5bn five-year deal from Italian utility Enel, in September 2019.

There were seven other bookrunners on the inaugural Enel deal, including BNP Paribas and Crédit Agricole. All three French banks were mandated for Chile’s SLB, an acknowledgement of the role that they have historically played in environmental, societal and governance finance.

Unlike a sustainable bond, where the use of proceeds is ring-fenced for specific purposes, an SLB is linked to the issuer’s achievement of broader goals. These are often chosen from the UN’s list of 17 Sustainable Development Goals, and coupons increase if certain sustainable performance targets are not met.

“One of the challenges of a sovereign SLB is achieving the right structure,” says Peter Borgesi, a New York-based SocGen originator in debt capital markets. One major difference between this and a corporate SLB is that the sovereign issuer is likely to undergo one or more changes in administration during the life of the bond.

The bankers worked together with Chile’s finance, environment and energy ministries to find the right key performance indicators to use for the transaction. Those finally chosen were annual greenhouse gas emissions (GHG) and non-conventional renewable energy (NCRE) as a percentage of total national electricity generation.

Meeting targets

The SLB references Chile’s Sustainability-Linked Bond Framework, which was published in February 2022. The framework expands the nation’s commitment to sustainable development through the issuance of SLBs, with the intention of achieving sustainable outcomes that are relevant to the country and its people. It also hopes to create a benchmark for other sovereigns.

The choice of emissions as a target was particularly apt, given the structure of the Chilean economy. “There is a large mining sector in Chile, and there have been market concerns about the level of emissions from activities such as lithium and copper mining,” Mr Borgesi explains. He points out, however, that these raw materials will also be critical for addressing climate change, noting lithium’s use in the production of batteries to power electric vehicles, for example.

Adhering to the Paris Agreement on climate change, the bond commits the issuer to achieve GHG emissions of 95 million tonnes by 2030, with an interim maximum of 1.1 trillion tonnes between 2020 and 2030. It also stipulates that 60% of national electricity generation (measured in megawatt hours) will be derived from NCRE by 2032, with an interim target of 50% by 2028.

If the 2032 generation target, or either of the emission targets are missed, the bond’s coupon will be stepped up by 12.5bps per annum, with a maximum annual penalty of 25bps and a maximum total of 200bps.

Managing risk

Any sovereign SLB is subject to the risk, at least in theory, that a new, incoming government might be less committed to the bond’s sustainability goals. Indeed, a new Chilean president — former student activist Gabriel Boric — was sworn in this year, when the bond was already structured. However, he and his team are, if anything, greener than their predecessors.

“Here, the focus is more on whether the targets might be revised in a way that was even more ambitious,” says Richard Sanders, a New York-based SocGen director of impact structuring. “There is an element in the structure that allows for the framework to be revisited if more ambitious targets are proposed.”

A second-party opinion on the bond was sought from Sustainalytics, which assessed the emission target’s alignment with International Capital Market Association principles as “very strong” and the energy target’s as “strong”. Emission performance will be judged by the technical team of experts of the UN Framework Convention on Climate Change. Energy performance will be reviewed by Chile’s independent National Electrical Coordinator.

When the bookrunners started having initial conversations in December 2021 and January 2022, market conditions were extremely positive — robust demand, interest rates at historic lows and central banks supporting markets globally.

By the time the bond was launched at the beginning of March 2022, conditions had gone into reverse. Rates were rising, central banks were taking a harder line and bonds were getting harder to sell, particularly out of emerging markets. And then came Russia’s invasion of Ukraine.

There was no indication that funding costs were likely to improve over the next couple of months, so the issuer went ahead with three days of marketing for a 15-year euro and a 20-year US dollar tranche. More market instability, however, prompted a decision to proceed only with the US dollar tranche. The targeted size of $2bn remained constant.

The deal was announced with initial price thoughts around 55bps back of fair value or Treasuries plus (T+) 240bps area. Demand was vigorous and remained so even after guidance was tightened to T+205bps. The final order book stood at around $7bn with strong representation from European funds. The final spread was T+200bps, showing a 15bps new issue concession, with a 4.34% coupon and a reoffer yield of 4.346%.

Chile is now the only country in the world to have green, social and sustainability-linked bonds, according to the Climate Bonds Initiative, a non-profit organisation. Other sovereigns who have said they are considering an SLB issue are the UK and Uruguay.

“This opens a new avenue for sovereigns to communicate with their investor base on climate and other areas — such as biodiversity,” Mr Sanders says.