EGE Haina’s $300m sustainability-linked bond, the only dollar new issue from Latin America last week, primarily caught the eye of investors and bankers for its unusual execution. Initial price thoughts of 5.75%, the number, were a surefire way of ensuring the issuer did not pay more than its target yield, but effectively ruled out the possibility of building price tension and landing inside that figure.
Yet the Dominican electricity generator’s deal was to some extent a reflection of one of the broader issues being debated in Glasgow last week at the United Nations Climate Change Conference (COP26).
Under the SLB, Haina had committed to significantly increase its renewable energy capacity — thus contributing to the Dominican Republic’s aim of deriving a quarter of its energy from renewable sources by 2025. However, for some EM bond buyers, the fact that a small portion of Haina’s electricity still comes from coal, for example, was a strict no-no (though a three times oversubscribed book and decent aftermarket performance suggests this was a minority).
How fast a transition is fast enough? Over at COP26, putting EM on a sustainable path was one of the topics of the week, as the world wants all countries to adopt Net Zero targets by 2050.
But major EM countries are fighting back at having targets imposed if they’re not going to get the cash they’ve been promised. The Like-Minded Developing Countries ministerial meeting, including China and India and representing over half the world’s population, has argued that the call for Net Zero by 2050 is “anti-equity and against climate justice” — particularly as developed countries are failing to deliver on the $100bn of climate funding promised to the developing world in 2009, let alone the $1tr that Indian prime minister Narendra Modi is demanding.
Anti-EM bias?
EM leaders from across the world took their chance to demand more support from the rich countries that have been overwhelmingly responsible for climate change, and Latin America leaders were quick to get in on the act.
Bolivia’s Luis Arce bemoaned that “market solutions” had failed, Ecuador’s Guillermo Lasso proposed financing a new marine reserve in the Galapagos Islands with a debt-for-nature swap (as being implemented in Belize), while Argentina’s Alberto Fernandez suggested that the country could repay some of its debt mountain with climate investments, rather than cash.
As one LatAm syndicate banker put it, “EM issuers have all the incentives to ask for this right now as developed nation politicians cannot say no on the spot.”
Whether that translates into the climate financing that the developed world has already promised, let alone the larger amounts many emerging nations are after, is another question. But, from our chats to EM bondholders last week, you can expect them to be fierce cheerleaders for the countries whose budget deficits they finance.
EM sovereigns are “on the frontline” and highly vulnerable to climate change shocks, noted the head of EM debt at one European fund, but they’re also “very much hostage to the broader discussion going on between the governments of developed economies”.
What’s more, some investors argue that this feeling of EM voices being marginalised is carried over into capital markets. Blindly applying ESG criteria from rich countries onto poor nations is “very biased against emerging markets”, reckoned one fund manager.
As criteria are applied more stringently, it could eventually have implications for allocations of funds to emerging markets, because developing countries are always going to score below developed ones in ESG rankings.
“We try to convince [end investors] that it’s the trajectory, not the current score, that matters, but not all clients have time for in-depth conversations,” said another EM bond buyer.
Have a great week, and do get in touch for a free trial to access all of GlobalCapital.
Saludos, Olly
This is GlobalCapital's LatAm Letter written weekly by Latin America reporter Oliver West. If you enjoy it, sign up for free in a matter of seconds here and feel free to pass it on to colleagues and contacts.
The best of last week’s LatAm bond coverage:
