This could get triggered by debt management – for example through the refinancing of maturing green debt via tender offer and new issuance – as well as corporate changes, such as the disposal of green assets.
Given the unique features of sustainability debt, such trades require careful planning. The following considerations are particularly important:
1. Nature of output security
Legally, green bonds don’t require any special treatment when considering liability management solutions. However, reputationally they will likely shape a firm’s approach in terms of output security. It is arguably more “natural” to refinance a green bond with another sustainability-oriented debt instrument. A “green to conventional” liability management could risk confusing investors and other stakeholders about the firm’s consistent commitment to sustainability
2. Economics and hit rate
By and large, various green bond investors are expected to be somewhat more reluctant to sell their holdings than those of conventional bonds, unless there is concurrent new issue of “green” bonds as direct replacement assets. This group of investors have wider sustainability objectives which usually a compelling buy-back price alone won’t satisfy; particularly if they struggle to reinvest proceeds in comparable green debt. This will likely impact the hit rate and economics of green-targeted buybacks.
3. Green asset management
Standard general corporate purpose bonds don’t require a significant amount of investor communication throughout their lifespan. This is not necessarily the case for green and similar ‘use of proceeds’ securities. Companies are expected to maintain a specific portfolio of green assets throughout the lifetime of the instrument – in fact, such commitments are more regularly being referenced in sustainable finance frameworks. If they have been forced to sell-off part of the original green asset pool, they are expected to identify alternative assets and communicate the changes to the market.
4. Living and breathing frameworks
In case a company’s green assets and liabilities no longer match, it may also decide to restructure its Green Finance Framework and introduce new eligible project categories. While this could lead to accusations of green dilution (particularly if the new projects are seen as less ambitious or environmentally impactful), it’s likely to be a preferred route to a wholesale buyback of the green bond which can be challenging to achieve full redemption.
Liability management tools are essential for a company’s financial sustainability. Yet when they involve green bonds, it’s not just the numbers that matter.
Liability management transactions targeting green bonds