Mercedes-Benz (GER:MBG) has converted an €11bn revolving credit facility into a sustainability-linked loan, which is the second largest of its kind in the European market.
- Mercedes-Benz Group AG has converted an €11 billion revolving credit facility (RCF) into a sustainability linked loan (SLL).
- Maintaining access to funds sustains the company’s credit rating while achieving ESG-based key performance indicators (KPIs) will lower interest costs.
- Higher interest rates and slowing economic growth has reduced green and sustainable issuance forecasts for 2022. Sustainability-linked issuance, however, has grown in size, providing hope for transition financing.
Mercedes-Benz Group’s refinancing of its revolving credit facility into an SLL helps retain its credit rating while potentially lowering interest rates. The company has set an ambitious target of being CO2 neutral by 2039, yet it can be selective in choosing KPI’s for its SLL.
MBG has formed its sustainability strategy using a holistic approach. It has supplemented internal research with feedback from suppliers, experts, and also performed analysis on its impact on the UN’s Sustainable Development Goals (SDGs).
The size of MBG’s SLL, the second largest in the European market, will support the increase in sustainability-linked debt instrument volumes.
The category has grown even as the broader bond market, and green and sustainability issuance has declined. This suggests companies are getting more aggressive about their carbon and energy transition plans.
Converting RCF into SLL kills two birds with one stone
MBG’s conversion of its €11 billion RCF into an SLL serves multiple purposes. It helps support the company’s investment grade ratings, while potentially lowering its interest expense. Maintaining backup liquidity to manage unforeseen risks is a requirement by credit ratings agencies.
It also provides the flexibility of using the funds for non-sustainable purposes. Unlike green and sustainability bonds and loans, SLLs are not use-of-proceeds sustainability instruments. Despite that flexibility, they are considered part of the green, social, sustainable and sustainability-linked (GSSS) universe, and therefore SLLs reflect positively on the books of banks and lenders.
MBG’s SLL was the second largest SLL financing on the European market according to Skandinaviska Enskilda Banken AB (STO:SEB-A), a Swedish bank and co-sustainability advisor to MBG.
Materiality analysis guided key performance indicators
The loan KPIs were selected from a materiality analysis conducted by the company. The analysis forms the basis of the company’s sustainability strategy, incorporating internal research with SDG impacts, stakeholder surveys and feedback from industry experts.
Using this analysis, the company has set an ambition to be CO2-neutral by 2039. Its Ambition 2039 programme attempts to establish a holistic approach to all stages of the automotive value chain, going from technical development and the extraction of raw materials, to production, servicing and recycling.
In its announcement, MBG provided an example of a KPI, which is the growth in the worldwide share of its fully-electric vehicle fleet. It did not provide a specific target.
Sustainability-linked instruments defy broader market malaise
Market forecasts for the issuance of GSSS issuance have declined drastically for 2022. S&P has reduced its forecast by 42%, after issuance declined 20% in the first half. This decline, however, was less than that of the broader bond market.
Sustainability-linked bonds (SLBs) and SLLs, on the other hand, were up 21% on the prior year period. As a result of the decline in overall GSSS issuance, their proportion has increased to 11% of the total, compared to 7% in the first half of 2021.
SLBs and SLLs have emerged as the instrument of choice for issuers in hard-to-abate industries that are not planning large-sized green or social projects. The flexibility from using the proceeds for general expenses while meeting certain key performance indicators adds to their attraction.
Corporate, green and sustainability bond issuance forecasts may decline further if economic conditions worsen. But continued growth in SLBs and SLLS may suggest that companies are becoming more aggressive about their transition plans.