Tuesday 29 May 2018

How a direct impact project bond could change the future of finance in Asia.


As Sole Arranger and Lead Manager, BNP Paribas played a pivotal role in the landmark US$ 95 million Sustainability Bond issued in February by the Tropical Landscapes Finance Facility (TLFF). The transaction was a groundbreaking one in many ways – it's the first Sustainability Bond in ASEAN and also the first Sustainability Bond in Asia to support a corporate. Through this highly structured deal, the bank is playing its role in enabling positive social, environmental and economic outcomes in the region.

The multi-tranche senior secured fixed rate Sustainability Bond will fund PT Royal Lestari Utama (RLU), an Indonesian joint venture between France's Michelin and Indonesia's Barito Pacific Group, for climate-smart, wildlife friendly and socially inclusive production of natural rubber on heavily degraded land in Indonesia's Jambi, Sumatra and East Kalimantan provinces. Occupying some 88,000 hectares of land, the project has the potential to meet up to 10% of Michelin's global natural rubber demand when it is operational.

We speak to Luc Cardyn, President Director of PT Bank BNP Paribas Indonesia on this regional milestone in sustainable finance.

The TLFF bond is the first Sustainability Bond issued by a corporate and also the first Sustainability Bond in ASEAN. What was the significance of this bond / transaction?

TLFF seeks to mobilize international capital markets to provide funding for two areas that respond to Indonesia's nationally determined contributions: sustainable agriculture and renewable energy projects. The US$ 95million Sustainability Bond is TLFF's inaugural transaction, and incorporates extensive social and environmental objectives and safeguards.

It's the first project bond in rubber plantation and the first project bond in Asia with an Aaa rated tranche by Moody's. But perhaps more importantly for the green and impact investment funds that will purchase the long-dated (due in 2033) bonds to finance the loan, it will have a positive impact on the environment with more than 45,000 hectares set aside for livelihoods development and biodiversity protection.

This transaction is particularly significant to BNP Paribas. Committed to the UN's Sustainable Development Goals, sustainable finance and investment is core to our client business development and corporate strategy – in December 2017, UN Environment and BNP Paribas signed an MoU at the One Planet Summit in Paris to target innovative sustainable finance of US $10 billion by 2025.

We expect the bond to be well received by our corporate and institutional clients, which would reflect their appetite to invest in projects and companies that combine commercial and financial performance with clear environmental and social purpose and impact.

How does this bond differ from other bank-issued green and sustainability bonds?
Unlike bank-issued green bonds and sustainability bonds, the funds from this transaction will be directly invested into a single project that seeks to develop long-term, scalable and profitable investment that carries meaningful - and challenging - conditions around its contribution to Indonesian local communities, the local environment and the local economy. The process for use of proceeds and ESG monitoring, data collection, consolidation and reporting are clearly defined and formalized.

BNP Paribas structured the transaction using project finance and securitization techniques, and the multi-tranche senior secured fixed rate notes is supported by a loan partially guaranteed by United State Agency for International Development ("USAID"), a United States Government Agency. The notes notably include a US$30 million 15-year tranche which was rated Aaa(sf) by Moody's.

What were TLFF's objectives for issuing this bond and how did the Bank ensure that these objectives were met?
TLFF aims to bring long-term finance to projects and companies that stimulate green growth and improve rural livelihoods in Indonesia.

"The deal heralds a new era in innovative sustainable finance in Asia, and another advance in achieving the wider UN Sustainable Development Goals"
Luc Cardyn, President Director of PT Bank BNP Paribas Indonesia

The project financed through the Sustainability Bond consists of the responsible management of a rubber tree plantation, the conservation of a biodiversity area and provisions to improve the livelihood of local populations in rural regions of Indonesia, contributing to several of TLFF's core objectives. In addition, in line with TLFF ESG Policy and Standards, an external environmental and social due diligence assessment was carried out for the project.

The bond was highly structured and complex – what was complex about it and why?
There were multiple complexities involved. In terms of structuring, this is the first project bond in Indonesia with a single partial guaranteed loan repacked into multiple classes of notes. With no precedent for this type of bond, we needed to ensure that the terms and conditions, claim process, payment mechanism and cashflow were synchronized and structured carefully.

We also needed to ensure that the needs of the multiple transaction parties involved were aligned throughout the process.

BNP Paribas played multiple critical roles and our teams across Europe, Hong Kong, Singapore and Indonesia worked seamlessly to drive this landmark transaction together.

What is the significance of this transaction for the sustainable finance industry going forward?
The deal heralds a new era in innovative sustainable finance in Asia, and another advance in achieving the wider UN Sustainable Development Goals. The project is expected to open up a new stream of investment from both institutional and impact investors. It is the role of banks today to enable sustainable and impactful projects, and this transaction is a good example of how financial institutions can generate real and positive social and environmental outcomes.


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