Uruguay announces its first climate bond

On Thursday, October 20, the Uruguayan government announced the issuance of a global dollar bond indexed to compliance with climate change targets, the first of its kind in Uruguay.

Based on information from Bloomberg News, the bond with final maturity in 2034 will have a 15 percentage point increase or decrease in the coupon starting October 28, 2027, if the country meets or exceeds the two environmental targets.

The market’s expected size for the sustainability-linked bond (SLB) is about US$1 billion, of which US$750 million will be new money, Puente said in a report it sent to clients on Thursday. The interest rate indication was 195 basis points on U.S. treasury bonds.

The Ministry of Economy and Finance Debt Management Unit also reported initiating an offer to repurchase certain global dollar bonds.

In particular, these will be global dollar bonds maturing in 2024, 2027, and 2031.

“The relative scarcity of ESG (environmental, social and corporate governance) instruments will likely result in greater demand for ESG funds, which should reduce the premium,” TPCG chief economist Juan Manuel Pazos and strategist Santiago Resico wrote in a note Thursday, Bloomberg reported.

“It is unclear which forces will prevail, as the bond structure is the first of its kind at the sovereign level,” the specialists added.

Uruguay last tapped global debt markets around the end of 2021, when it sold a 50 billion yen (US$334 million) instrument.

Based on Bloomberg information, it also issued US$2.4 billion in dollar-denominated bonds with a coupon of 4.375% in January 2019.

THE TARGETS

For its bond tied to sustainability goals, the government defined two objectives. On the one hand, achieve at least a 50% reduction in greenhouse gas emissions by 2025.

On the other hand, maintain at least 100% of the total area of native forests, also by 2025, based on Bloomberg information.

The interest rate will be maintained if Uruguay meets these goals.

The interest rate will be lower if the reduction of greenhouse gases is 52% and the area of native forest increases by 3%.

Uruguay is the second country after Chile to issue this type of bond. The Andean country raised US$2 billion with targets linked to renewable energy and greenhouse gases.

According to Bloomberg, investor skepticism regarding SLBs is on the rise. Bloomberg News analyzed more than 100 SLBs worth close to €70 billion sold by global companies to European investors.

Of those, it noted that most are linked to climate targets that are weak, irrelevant, or even already achieved.

As a result, according to the researchers, companies receive better financing terms without real efforts to meet targets.

With information from Bloomberg