Global credit funds & CLO's
July 2020 | Issue 225
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July 2020 | Issue 225
News CLOs
Revolutionary ESG-linked loan wins CLO support
Michelle D’souza
Michelle D'Souza headshot
European loan investors welcomed a novel concept in June when Carlyle Group-backed Logoplaste issued the first term loan with pricing linked to environmental, social and governance (ESG) factors.
Sources say similar transactions can be expected, as interest in ESG surges amid the coronavirus pandemic.
Carlyle won unanimous support when the deal was rolled out to the existing debt syndicate and the loan appealed to CLOs, sources say. There is demand for ESG loans among the CLO community, with several recent CLOs being marketed as ESG compliant.
“This is the start of a market movement towards supporting the driver for change,” says Ben Crosse, Madrid-based partner at Linklaters. “It won’t dramatically damage the returns for CLOs but it provides an incentive for the borrower. It shows an overall market responsibility towards these types of initiatives.”
Sustainability is at the heart of Logoplaste’s approach, sources say. The company, based in Cascais in southern Portugal, produces rigid plastic containers and operates a predominantly on-site model, eliminating secondary packaging for customers. This saves around 12,000 tonnes of carbon dioxide emissions per annum.
Logoplaste uses a carbon dioxide saving goal as its key performance indicator (KPI). Its loan exhibits a margin ratchet whereby if Logoplaste reaches the KPI, pricing on the term loan reduces by 5-10 basis points, but pricing increases if Logoplaste misses its target.
“This is a KPI where we found a real confluence of economic and environmental objectives,” says Sam Lukaitis, director in the global capital markets group at Carlyle in London. “The pricing move isn’t immaterial, particularly for debt investors facing rating downgrades and whose portfolios are in some cases trading significantly below par. For these investors to potentially accept any reduced pricing right now based on sustainability metrics is a big step.”
The ESG concept tied to KPIs is one Carlyle will consider on other deals, including existing assets and new buyouts, says Lukaitis.
“It’s not a one-size-fits-all approach. The metrics need to be meaningful, thoroughly researched and tailored to the specific business,” he adds.
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“Metrics need to be researched and tailored to the business”
Sam Lukaitis, Director in global capital markets group | Carlyle