NEW YORK, July 9 (LPC) - Georgia Renewable Power closed the first green loan in the US institutional leveraged loan market last month, giving investors a rare chance to diversify their portfolios while meeting environmental goals.
The US$525m term loan B follows similar transactions from European borrowers such as Spanish telecommunications group MásMóvil and Portuguese plastics firm Logoplaste, which have both raised loans tied to Environmental, Social and Governance (ESG) measures.
Interest in green finance has grown as pressure mounts on companies to implement more sustainable business practices. Banks and investors are also under duress from stakeholders to allocate funding toward ESG initiatives. Some investment firms, such as Invesco, have launched clean energy funds.
While the phenomenon has propelled growth for green or social bonds, institutional term loans remain scarce, particularly for borrowers rated below investment grade.
Companies that tap the US institutional leveraged loan market are typically private and, in many instances, are backed by private equity firms. Therefore, leveraged borrowers’ desire to not disclose transactions with the larger public can conflict with green finance, which champions transparency.
“It’s difficult expanding green lending because (leveraged) borrowers share what they need to and not more,” said one senior banker. “Portfolio companies make up a large part of the leveraged universe, and investors want to know more about what they are doing in exchange for their commitment to a green deal.”
With green loans in their infancy, bankers reckon Georgia Renewable Power is an ideal candidate to introduce the new debt instrument to the institutional market. The borrower owns two biomass-fired power plants, and there’s little doubt about the proceeds going toward renewable power needs.
“Because it’s funding a renewable energy source, that’s the identifiable green element for investors that want to expand their portfolios,” said a second banker.
The loan also conforms with the Green Loan Principles developed by loan trade group, the Loan Syndications and Trading Association, along with its European peer the Loan Market Association and the Asia Pacific Loan Market Association.
Not only must Georgia Renewable Power ring-fence the proceeds under the outlined green principles, it must also conduct regular reports on the development of the power plants to ensure renewable energy practices are upheld, according to the second banker.
A spokesperson for the company did not returns calls requesting a comment before press time.
While investors benefit from the borrower’s transparency, there is an inherent risk participating in a loan for untested power facilities. Georgia Renewable Power’s new assets, located in the state’s Franklin and Madison counties, only became operational earlier this year. Buyers of the loan sought a steep margin in exchange for that risk, the first banker added.
The seven-year loan was offered at 700bp over Libor, plus 200bp through payment-in-kind. The average drawn spread of a term loan B rated Double or Single B was just 435bp at the end of June, according to Refinitiv LPC data.
“The risk lies in determining how these assets will perform. These are new plants that were under construction for several years. Now it’s a matter of flipping the switch and hoping they work,” the second banker said.
Morgan Stanley was the sole placement agent on the green loan for Georgia Renewable Power.
With the first green US institutional leveraged loan in the books, bankers are hopeful more will follow.
Sustainable finance is no longer a trend, but a long-term underlying investment theme, according to Anne van Riel, the co-head of sustainable finance capital markets at BNP Paribas.
Green debt was first adopted by investment grade companies and moved to high-yield bond issuers before trickling down to the loan market.
“The institutional loan market has evolved, and investors now demand a green criteria,” said van Riel.
Reporting by Aaron Weinman. Editing by Michelle Sierra and Kristen Haunss.