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Sustainable bond issuance in Latin America is heading for a strong year in 2024 amid greater investor interest, bigger ticket deals and a more diverse issuer base as countries continue to strengthen their regulatory frameworks.
Data from the London Stock Exchange Group (LSEG) shows a 6% increase in proceeds from green, social, sustainability and sustainability-linked (GSSS) bonds in the region so far this year compared with the same period of 2023.
Issuers placed $11.65 billion of the notes in local and international markets through June 20, compared with $11.01 billion in the same period last year, according to the data.
Driving volumes of GSSS bonds (also known as labelled bonds) this year has been stronger cross-border debt issuance more generally from the region, said Rafael Janequine, associate director for sustainable finance at S&P Global.
“When we kicked off this year we had many more windows for international issuances” compared to 2023, when local currency deals — which are typically smaller than global transactions — were stronger, Janequine said.
“This is one of the drivers that could lead to a historic peak in terms of labeled bonds being issued this year,” he added.
MARKET SHARE
Despite these gains, the surge in overall Latin American bond deals this year — they are up 35% to $71.7 billion — has left GSSS issuance with a smaller slice of the pie, a 16% share year to date versus 21% in the year-ago period, LSEG’s data shows.
Issuers from Mexico, Brazil and Chile continue to account for a large chunk of this year’s GSSS transactions, with more than 80% of the bonds originating in these three countries, according to the data, up from a 67% share for full-year 2023.
In January, Mexico raised around $2.2 billion in the international market for programs under the country’s United Nations’ sustainable development goals, while Chile placed a $1.75 billion five-year social bond. And in June, Brazil priced a $2 billion sustainable bond offering to repay federal public debt and fund green and social investments.
“On the sovereign side, LatAm continues to be a leader in the labeled bond issuance space,” says Viktor Szabó, an emerging market portfolio manager at abrdn.
Sovereign issuance in the region — both local and hard-currency debt — has surpassed $7 billion already this year, a significant slice of the $22 billion sold by emerging market nations, he said.
“I think that now that most major countries have established frameworks, they will continue to issue both vanilla bonds and label bonds,” said Szabó. “We have decent scope to achieve at least as much as last year.”
On the corporate side, Raizen Fuels’s $1.5 billion sale in February was the year’s largest deal to date, according to LSEG, raising cash for its renewable energy and energy efficiency projects as well as to push out debt maturities.
HYBRID DEALS
Both sovereign and corporate issuers have also taken a hybrid approach to labeled bond issuances, sometimes blending social and green finance so that they are not limited by a lack of eligible green projects in budgets, according to market participants.
State-bank Banco do Brasil, for example, issued a 6% sustainability bond in March with proceeds destined for environmental and social projects such as financing micro, small and medium-sized businesses, especially those led by women, as well as for renewable energy.
Tamara Tisminetzky, a director at Sustainable Fitch, noted that financial institutions are becoming more active in the GSSS space, particularly in Brazil.
Latin America has been a pioneer in issuing new types of labeled instruments. Chile, for example, in 2023 updated its sustainability-linked bonds (SLBs) in an exchange offer, adding more key performance indicators (KPIs), with bond coupons linked to the achievement of the predetermined sustainability targets.
“We were used to having only SLBs with environmental KPIs, but in the last 18 months that has changed a lot,” S&P’s Janequine explains. “More environmental plus social KPI instruments are coming to market, not only on a corporate but also on a sovereign level.”
Chile was the world’s first sovereign to issue such a bond, which included a gender-based KPI, he added.
GOING GREEN
In terms of GSSS segments, the biggest advance this year has been in green bond issuance, which totaled $4.45 billion through June 20, a 96% increase from the year earlier period, according to LSEG data. By contrast, Latin American SLB issuance declined 12% to $5.37 billion in the same timeframe.
While Szabó says he would like to see more SLBs in the market, he notes that there is still some reluctance from sovereign issuers, who prefer use of proceeds financing.
“It is hard for sovereigns to commit to acceptable KPIs,” Szabó says. “They need to commit to it through many political cycles where governments need to have an agreement between the government and the opposition to ensure the incoming governments will respect the commitments laid down in the facilities.”
Sustainable Fitch’s Tisminetzky attributes the slowdown to greater scrutiny of the credibility and ambition around KPIs and other targets compared with use-of-proceeds instruments.
“This scrutiny around SLBs means that we are seeing a bit of a slow-down in issuance, but it might be something positive,” she says. “The SLBs that do come to market will be stronger and more credible. This scrutiny might represent a temporary slow-down for a better outcome.”
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