Sustainability-Linked Term Loan B, a growing market segment with room for improvement

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Natixis Green & Sustainable Hub has conducted a survey to capture investors' considerations regarding Sustainability-Linked Term Loan B. 

In 2021, the Sustainability-linked Loans market progressed to c.$550bn representing c.10% of global syndicated loan issuance and c. 28% of total issuance in the EMEA. The first Sustainability Linked Term Loan B (SLTLB) was issued in 2019 by Masmovil.

Is this the beginning of a rapid growth phase for SL TLBs and will they become the new normal? Is there any possible guidance and underpinning science in determining the appropriate ambition level of the targets of SL TLB issuances, and quantum of any coupon variations? Can any type of company regardless of sector legitimately issue SL TLB? Are the related costs and benefits appropriately shared between investors and issuers? How to manage evolving sustainability targets and changing methodologies over time?

Investors’ appetite and expectations on the instrument will largely shape the answer. In a desire to better understand this innovative segment from an investor’s perspective, Natixis decided to undertake a dedicated survey at the end of 2021. This initiative sought to understand investors’ appeal, concerns, themes of interests and preferred structure characteristics for SL TLBs in order to offer dedicated and suitable solutions for clients.

Across 20 global investors respondents, managing c. EUR 6.6 trillion AuM, about 70% declared having an appetite for SL TLBs. A large proportion of investors are considering allocating SL TLBs in both their conventional portfolios (71%), as well as in their ESG integrated (79%) portfolios.

Respondents demonstrate strong interest in benchmarking the ESG credentials of loan issuers in their portfolios, with a focus on increasing requirements for transparency and alignment with net zero transition goals.

However, the concept of SL TLBs sparks questions, and investors raise some concerns. First of all, most of them (80%) fear greenwashing or lack of sustainable ambition with the use of SL TLBs. Additionally, the alignment of SL TLB’s with the European taxonomy criteria, and the requirements of SFDR, is questioned. The fact that Key Performance Indicators (KPIs) are customized borrower defined criteria raises some doubts about the lack of comparability (40%) or even the complexity of the instrument (40%). The ambition of KPIs should be embedded in a long-term strategic approach rather than just focusing on short-term deliverables. Regarding the areas of interests for KPIs, environmental ones are broadly accepted to structure SL TLBs, but there is also a strong interest on social and governance themes.

To conclude, we can assert that SL TLBs will continue to be part of the sustainable products landscape. Since first developments of the SL TLB market, Natixis sees a strong potential to this innovative tool that should allow borrowers to include additional sustainable features over their financing and provide portfolio managers with a complementary benchmark. Yet, ESG TLB loan structurers should be careful to ensure KPIs are directly relevant to a borrower's specific industry and reflect overarching net zero transition goals. For the time being, SL TLBs are primarily a communication vehicle for a borrower’s ESG strategy and trajectory rather a portfolio construction tool, a position which may evolve in the future.

The detailed results of the survey and associated statistics will be presented and published in the coming week, so stay tuned and have a look at our investors trend section where it will be published soon: https://gsh.cib.natixis.com/our-center-of-expertise/categories/investors-voice