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Europe’s first sustainable junk bond draws scrutiny over green impact

Greece’s main power utility has raised €650m in Europe’s first sustainability-linked junk bond sale, a deal that drew scepticism from some investors over the extent of its green impact.

Public Power Corporation, Greece’s state-backed utility company, issued the five-year high-yield bonds at an interest rate of 3.875 per cent. The deal, which priced late on Thursday Athens time, drew strong demand, allowing the group to increase the size of the package by €150m.

The debt sale is the latest in the booming green market, through which companies have already issued almost $60bn in debt this year, according to figures from Refinitiv. While advocates say this type of financing will help borrowers achieve better outcomes from a sustainability and environmental perspective, sceptics worry some projects will not deliver on their green promises or even that green investors are rewarded for failure.

Sustainability-linked bonds differ from the more popular green bonds as there is no requirement to spend the money raised on green projects. Instead, they are linked to the ambitions of a company and its ability to reach targets that it sets for itself.

Like other utilities, PPC generates power through a mix of renewable sources and fossil fuels, including coal. The group, which is 51 per cent owned by the Greek government, plans to cut its carbon emissions by 40 per cent by December 2022. If it fails to hit that target, the bond’s coupon will increase by 0.5 percentage points, a so-called ratchet that in effect pays bondholders more if the group misses its goals.

Sustainable investment in carbon-intensive industries such as power generation is tricky. Often, companies can seek finance to put them on a more environmentally sustainable path, but the structure of deals can open up potential conflicts of interest and even compensate investors for a company’s failures — a disincentive for the borrower but probably not what a fund’s end investors wanted to see.

Vivek Bommi, senior portfolio manager at Neuberger Berman, said companies could easily set goals that they know they will meet. “If a company is really making improvements, markets will reward them with better debt prices anyway,” he said.

“The improvement in credit spreads should be left more to the market to determine,” he added.

Philipp Buff, head of credit research at Pictet Asset Management, added PPC’s target could have been more ambitious compared with its business plan given that by 2023 the group aims to cut carbon emissions by 62 per cent. He added that a 0.5 percentage point ratchet was also conservative.

“The financial penalty probably should move closer to where a ratings downgrade penalty would be, around [1.5 percentage points].”

However Mitch Reznick, head of research and sustainable fixed income at Federated Hermes, noted that although PPC set its own goals, there was “no guarantee” that it would meet them: “This is an incentive to continue with [the plan] . . . there’s an incentive for them to not screw it up.”

The company has embarked on a sustainable turnround plan and aims to phase out all coal power plants by 2023, focusing on renewable energy sources, as well as modernising its power grids.

George Stassis, PPC chief executive, told the FT: “I think it’s quite brave and you don’t find a lot of utilities that are embarking on such a journey.”

He added that the company had considered raising a green bond but could not restrict the funds for a single project.

“I challenge those [questioning the sustainability-linked bond] to show me utilities that have taken this sustainable path . . . Once you are already on this path things seem very simple.”

Stassis added that the company aimed to reach investment-grade status in years to come and that it would return to the market. “This was an intro for us . . . We can be very flexible and add more [targets] The way forward are the sustainability-linked bonds.”

Europe’s inaugural sustainability-linked junk bond highlights how the demand for green finance has reached even the riskier parts of the corporate debt market. PPC is rated BB- by credit rating agency Fitch and the bond is not backed by particular assets in the case of default.

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