Uruguay issues sovereign sustainability-linked bond with coupon ‘step-down’
The two-way pricing structure is triggered by whether the SSLB underperforms or outperforms two Paris-aligned KPIs.
Uruguay has launched a sovereign sustainability-linked bond (SSLB) incorporating a two-way pricing structure that will trigger a coupon “step-down”, rewarding the country by lowering borrowing costs if it outperforms its Nationally Determined Contribution (NDC) targets.
The framework document for Uruguay’s first SSLB calls the pricing mechanism an “alternative approach” to sustainability-linked debt financing, given that it links the countryʼs cost of capital to its climate change mitigation and nature conservation goals under the Paris Agreement.
The “incentive-compatible financing mechanism” incorporates a coupon step-up, which penalises the country by raising the interest rate if it fails to meet its commitments, as well as a step-down trigger to “reward” Uruguay for any outperformance of its “already-ambitious” NDC targets.
These targets are tied to two key performance indicators (KPIs), the first of which is the reduction in the aggregate gross greenhouse gas (GHG) emissions per real GDP unit with respect to a reference year (KPI-1). The second is the maintenance of native forest areas with respect to a reference year (KPI-2).
The Sustainability Performance Targets (SPTs) are based on quantitative goals set for 2025 as established in Uruguay’s NDCs and build on existing commitments to cut its aggregate gross GHG emissions intensity by half and maintain 100% of its native forest cover.
The framework is a combined endeavour undertaken by the Ministry of Economy and Finance, the Ministry of Environment, the Ministry of Industry, Energy and Mining, and the Ministry of Agriculture, Livestock and Fisheries, with the support of the Ministry of Foreign Relations.
According to the framework document: “Through this innovative mechanism, Uruguay intends to align its financing and sustainable policies and, most importantly, create incentives for over-performance, helping foster the countryʼs connection with its climate agenda and further promoting the benefits associated with it.”
The country argues, in its SSLB framework that mainstreaming Paris-aligned KPIs embedded in SSLBs could “help strengthen NDC systems as more sovereigns utilise this funding instrument in the market”.
In Latin America, sovereigns are finely attuned to the impact that climate change will have predominantly in emerging markets, and are proactively taking steps to support initiatives that drive sustainability and equality in their local communities.
Following in Chile’s footsteps
In March this year, Chile became the first country to issue an SSLB. The $2 billion offering is linked to two KPIs aimed at reducing emissions and increasing use of renewable energy.
In a note published at the time, Monica Hanson, head of official institutions coverage, Americas, at BNP Paribas, said: “In Latin America, sovereigns are finely attuned to the impact that climate change will have predominantly in emerging markets, and are proactively taking steps to support initiatives that drive sustainability and equality in their local communities.”
Her colleague, Anne van Riel, head of sustainable finance capital markets Americas at BNP Paribas added: “This trend-setting transaction is likely to garner interest from countries with similar aspirations that to date have been waiting on the sidelines.”
Elsewhere, a new Sustainability-linked Sovereign Debt Hub has launched with the aim to provide issuers with technical guidance and connections to build nature and climate outcomes into sovereign bonds.
