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Sunday, February 25, 2024

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International Capital Market Association issues recommendations for high-yield sustainability-linked bonds

The International Capital Market Association (ICMA) has launched a set of practical recommendations for high-yield sustainability-linked bonds on the 22nd May 2023. With implications on pricing, disclosure and reporting, the recommendations were developed in partnership with the European Leveraged Finance Association.

“Sustainability-linked bonds have always aimed to further develop the key role that debt markets can play in funding and encouraging companies that contribute to sustainability…

“These recommendations aligned with the sustainability-linked bond principles will help drive accountability and consistency in this growing segment of issuance,” Nicholas Pfaff, deputy CEO and head of sustainable finance at the ICMA, commented.

The various ICMA sustainability principles have had a notable impact on the sustainability Sukuk space with multiple facilities complying, including the US$1.2 billion green tranche of the recent Saudi Electricity Company Sukuk.

In a development last month, the Securities and Commodities Authority of the UAE issued a decision on the regulation of green and sustainability-linked Sukuk and bonds, mandating that they must comply with ICMA principles.

While not an asset class of their own, high-yield bonds and Sukuk are distinct from their investment-grade counterparts and include redemption provisions, covenant provisions and shorter tenors.

The higher representation of private company issuers for high-yield debt capital market instruments also has implications on disclosure and reporting.

While primarily focusing on high-yield sustainability-linked bonds, the 10 practical recommendations include three directives applicable to sustainability-linked debt capital market instruments, high-yield or otherwise.

The general recommendations include the proposal for issuers to demonstrate to investors the commensurate and meaningful nature of the coupon variation when the rate of return is triggered by sustainability performance targets (SPTs).

Additionally, issuers are encouraged to disclose their rationale for considering the economic value associated with the incentive mechanism in the context of their funding program.

As high-yield sustainability-linked debt capital market instruments often include a call option to redeem the facility before maturity, the practical recommendations call for issuers to demonstrate the change in call price is commensurate with reference to its overall cost of borrowing when triggered by the SPTs.

The practical recommendations follow the issuance of the ICMA’s Sustainability-Linked Bond Principles in 2020, its Guidance Handbook launched in 2022 and the Sustainability-Linked Bond Principles Related Questions issued in the same year.

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