The term "sustainability-linked loan" is already a bit of a mouthful. "Sustainability-linked loan bond" is even more so. But it may be a term we start to see more often.

Banks have been entering into SLLs in increasing numbers for a few years now, so why not recycle capital by bundling up a portfolio of SLLs and allowing investors to subscribe for a bond backed by the portfolio?

It should be a win-win: a bank frees up some capital (which could allow it to lend more SLLs) and investors get access to sustainable financing originated by a bank they trust.

A few issues occur to me:

  • in an SLL, the margin typically changes over the life of the loan, depending on the performance of the borrower against agreed sustainability targets. I wonder how this works in the context of a bond, where the coupon tends to be fixed at the outset? Will investors be able to accept the possibility of their return fluctuating over the life of the bond? How does this impact the marketability of the bond?;
  • would bondholder consent be required to amend the KPIs etc of an underlying SLL during the life of the loan?; and
  • as with any form of sustainable finance, the risk of greenwashing is never far away, so it's critical that the underlying SLL portfolio strictly complies with the criteria that have been set for the product.

There is certainly a need to diversify funding sources for SLLs. It will be interesting to see whether the issuance of sustainability-linked loan bonds is a strategy that gets adopted by the market more widely.

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