ISTAT Jetrader - Autumn 2023 - 28

Sustainability-Linked
Financings - Is the
Genie Out of the
Bottle?
by Michael Halaby
I
n the Winter 2022 issue of Jetrader, I wrote about
the emergence of sustainability-linked loans (SLLs)
and bonds (SLBs) in the aviation sector. These are
financings where the borrower (usually an airline)
issues debt in which the margin or coupon1
sustainability performance targets (SPTs).
As of 30 June 2023, nearly all airline financings2
fluctuates
based on the airline's overall performance against a
key performance indicator (KPI). The KPI incorporates
with an
ESG (environmental, social and governance) element have
been in SLF format. To date, " E " KPIs have been based on an
airline's pledge to reduce CO2 per passenger kilometer (CO2/
RPK) or per tonne kilometer (CO2/RTK). It is critical to note
that SPTs are based on the company overall - and, crucially,
not the individual aircraft being financed - to reduce
their emissions.
Transparency has been lacking overall and not necessarily
consistent, however. Approximately a quarter of 32
announced issuances since 2019 publicly disclosed SPTs and
coupon mechanics. Air France-KLM issued a dual tranche
bond in January 2023 in which their published target is to
reduce their well-to-wake (WTW) CO2/RTK emissions by
10% by 2025 versus their 2019 baseline. Air France then
issued a sustainability-linked loan in April 2023 but did not
publicly disclose those SPTs to the market. It would not be
unreasonable to assume that the SPT(s) would be similar, if
not identical, to the bond issued three months previously, but
that specific information has not been made public.
SLF mechanics are generally straightforward: If the
borrower meets or beats the SPT, then the margin remains
the same or benefits from a discount; should the borrower
not meet the target, then the margin increases by a certain
amount. Usually, these targets are tested periodically during
the life of the financing. In some cases, the margin may revert
should the borrower, having failed to reach the target, then
reach it at the next test date. There is one case3
in which a
1. For ease of reading, margin in this article refers to both margin and coupon unless otherwise noted
2. We have tracked 30 airline deals and 2 airport deals from 2019 through to June 2023
28 * THE OF F I C I AL PUBL I CAT I ON OF ISTAT

ISTAT Jetrader - Autumn 2023

Table of Contents for the Digital Edition of ISTAT Jetrader - Autumn 2023