Buyers of green bonds could become the next wave of activist investors. Debt earmarked for environment-friendly uses comes with more strings attached than today’s “covenant-lite” offerings, characteristic of private-equity-led buyouts.
With up to $60 trillion of investment needed by 2030 to offset climate warming and related issues, according to the United Nations, these creditors are well placed to push for change. In practice, credit investors tend to be supine. In today’s market for leveraged buyouts, they are giving up things like restrictions that prevent companies from paying their owners huge dividends while they have debt outstanding.
Such protections for creditors are missing from last month’s deal to finance Blackstone buying a majority stake in Refinitiv from Breakingviews parent Thomson Reuters, for instance, and from KKR’s Envision Healthcare debt.
Buyers of green debt are different. Companies and governments have to commit to use the proceeds only for specified purposes. That automatically gives bondholders more sway. Second, investors are increasingly demanding that companies provide enough information to ensure they’re sticking to the agreement – much more than traditional creditors get. A breach could force a borrower to pay higher interest rates or pay the money back. Third, there’s now a carrot as well as sticks: selling a properly structured green bond can actually reduce an issuer’s overall borrowing costs, according to research by HSBC.
Financing the United Nations’ sustainable-development goals – an effort whose urgency was underlined by a grim report from the organization’s Intergovernmental Panel on Climate Change on Monday – is likely to involve trillions of dollars more debt than equity. If the market becomes big enough for green bond investors to influence the terms of a company’s non-green paper, too, creditors could take over from shareholders as the activists to watch.
The United Nations and others have put the cost of financing the organization’s 2015 sustainable development goals at between $3 trillion and $5 trillion a year until 2030. Issuance of green bonds in the first half of the year topped $100 billion and may hit a record $250 billion for the year, according to the Climate Bonds Initiative.
Last month former Thomson Reuters financial and risk unit Refinitiv sold $5.5 billion of bonds as part of a $20 billion financing package for Blackstone’s acquisition of a 55 percent stake in the division from the media company, which is also the parent of Breakingviews. The bonds eliminate some safeguards for creditors.
Source Nasdaq