ESG Focus: The Next Big Thing – Part 8

ESG Focus | Nov 17 2021

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:

ESG Focus: The Next Big Thing – Part 8

Sustainability-linked loans are transforming the leveraged-loan market as corporations and investors eye ESG-driven M&A and dividend recapitalisations, and seek to mitigate ESG risks in standard transactions.

-M&A and joint-ventures on the menu
-Financial-services sector ripe for ESG-driven M&A
-Innovation in leverage-loan market
-ESG due diligence the new must-have

By Sarah Mills

Sustainability-linked loans (SLL) are about to change the leveraged loan market.

The world is flush with cash post-covid given bad debts performed better than feared; and corporations are assessing the potential for leveraged SLLs to fund mergers and acquisitions and capital-management initiatives.

Observers believe SLLs offer huge opportunities for the smartest and most sophisticated companies, given they allow corporations to tailor loans to their industry, business and strategy.

Those that do this well will enjoy windfalls through improved interest margins and strategic leverage. Leveraged SLLs can ratchet those returns up again.

Sustainability is also dovetailing with the digital revolution to form the fourth-industrial revolution.

Given the digital market is already ripe for M&A, regardless of sustainability, and given much of the digital innovation is likely to support sustainability; it is considered another prime market for SLL funding.

The mandatory verification of SLL performance against some ESG targets that were enshrined in the global SLL principles last May will, for the first time, give investors an insight into the previously private, relationship-driven syndicated loan market.

With greater transparency and accountability will come more deals: ESG-driven mergers & acquisitions; institutional loans, and private equity (we cover the latter two in coming articles).

Big end of town cashed up and ready to blow

The big end of town is gearing up for a leveraged SLL splurge. 

Banks, institutions and private-equity are cashed up after the trillion-dollar covid printing spree and intend to invest much of those funds into green, circular, and fourth-industrial revolution initiatives.

PWC expects investors will hone their sights on companies ranging from those with heavy balance sheets to those prioritising scaleable and technology-driven targets.

On the flip side, corporations are girding their loins for one of the biggest transitions in history and will be jockeying for position in the M&A market.

As the transition gains pace, M&A is expected to thrive as players seek to redefine portfolios and companies divest non-core businesses, or businesses which may affect their sustainability credentials.

Some corporations will be seeking to offload less-aligned assets to meet new strategic imperatives, and some to just simplify ESG reporting to gain investor favour. 

Others will be on the acquisition path, seeking assets that align with their ESG and fourth-industrial-revolution strategies, or to extract accretive ESG value where possible. 

There is already movement at the station. PWC reports the number of deals involving private equity rose to 36% in the first half of 2021, compared with the long-term average of 25%.

It is likely that some M&A is also being brought forward to pre-empt the higher standards of a transition environment.

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