Slovenia is set to become the first European sovereign to issue a sustainability-linked bond (SLB), an issuance shaping up to become a litmus test for the European SLB market.
The country hopes to raise €1bn by issuing debt with a ten year maturity in early July. It comes with a a final maturity bond coupon adjustment of +50bps if Slovenia misses a 2030 target on emissions of -35% vs a 2005 baseline, and a further adjustment of -50bps if it decarbonises more than -45%, providing the country with an incentive to ramp up the pace of its decarbonisation beyond current targets.
This comes as a number of European corporates, including Italian utility giant Enel have issued sustainability-linked debt. Enel's issuance earlier this year was more than two times oversubscribed. However, nations have so far been slow to embrace SLB's.
Over the last two years, issuance of SLB's has slumped as rising rates and fears over the credibility of KPI's posed new challenges.
Kevin Leung, a sustainable finance analyst at IEEFA, said: “Slovenia’s debut SLB marks a watershed moment for the SLB market, standing out amid declining issuance volumes. Its innovative tiered coupon structure – with both 50 basis points step-up and step-down features set on national emissions reduction targets – offers investors a way to account for varying decarbonisation outcomes, underpinned by more transparent policy planning."
Slovenia's target appears ambitious, according to Jonas David and Ulf Erlandsson from the Anthropocene Fixed Income Institute. "We estimate a 50% probability of achieving a step up and a 10% probability of achieving a step down" they predict. " The significantly higher probability of a step-up relative to a step-down means the net option value is positive for the investor (upfront value: 0.158%; running value: 1.8bps) and therefore the SLB should price at a lower spread than a vanilla bond of the same maturity" they predict.
