How green loans could compete with green bonds

Olam International organised Asia’s first green “club-loan” in April. But why would an issuer choose a loan over the increasingly mainstream green bond?

Finding innovative ways to finance its agribusiness, Singapore-based Olam International secured a pioneering $500 million three-year, sustainability-linked revolving credit facility in March.

Grouping 15 banks together in a “club” arrangement under the watchful eye of ING as the “sustainability coordinator”, it was the first of its kind in Asia.

Since then, Singapore and Hong Kong have seen two more loans classified as green totalling $1.52 billion, data from Dealogic shows, highlighting the first green shoots of an emerging new trend. 

Whilst more common in Europe, Olam corralled the 15 banks at its own behest after deciding that a loan rather than a bond was the most suitable means for raising the funds.

“With a green bond they are very narrowly focused and we wanted a more flexible arrangement,” Neelamani Muthukumar, group chief financial officer of Olam International, told FinanceAsia on the sidelines of a climate change conference in Hong Kong last week.

Green bonds, certainly, do come with a defined set of regulations attached that in some cases increase issuer costs.

But governments globally are keen to develop the asset class for their capital markets, with both Singapore and Hong Kong offering issuers incentives in the past year to help defray the costs of third-party certification.

By choosing to go down the loan route Olam swerved some of these costs and regulations, although the facility does not come without its own set of rules.

“We have over 50 metrics Olam needs to achieve, such as lowering our carbon intensity and ensuring board diversity,” Muthukumar explained, adding that the banks can each year appoint an independent party to examine its performance against these metrics.

If Olam is then adjudged to have met all the criteria then the interest on the loan in the second year is reduced by a fixed amount. But if they fail to comply, the interest rate remains the same.

That gives Olam an additional incentive to meet its commitments to sustainable financing.


And Muthukumar believes this model will gain traction in the Asian market as corporations and banks look to alternative financial sources to support green initiatives.

“The financial institutions are also keen to issue green loans as well,” Muthukumar said, echoing comments made by HSBC's Jonathan Drew on a panel at the same Hong Kong conference.

“There are good returns for banks to get into sectors like green buildings and renewable energy as they are showing very strong financial performance,” said Drew, managing director of the bank's infrastructure and real estate group for global banking, Asia-Pacific.

Recent deals provide further support.

On September 3, for example, Hong Kong-based Leo Paper Group signed a $45 million four-year green loan term and revolving credit facility with a group of seven leading banks.

That was followed by the $875.90-million green loan extended to Frasers Property by a consortium of seven banks.

Proceeds from the loan will be used to finance some 20 green projects in China over the coming years, according to a Leo Paper press statement, while the Frasers Property loan was used to refinance the debt backing its flagship Frasers Towers green building development in Singapore.
Looking to the future, both Muthukumar and Drew agreed that as green finance grows as a whole and becomes more mainstream, combinations of green loans, green bonds, sustainable bonds and social bonds will offer issuers, investors and arrangers greater flexibility to combat climate change.

That can only be good for everyone.   

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