The Chain: Wilmar and Overseas-Chinese Banking Corp. Loan Pegged to Sustainability Criteria


June 15, 2018

Overseas –Chinese Banking Corp (OCBC) stated it would peg Wilmar’s existing USD 200 million revolving credit facility interest rate to sustainability criteria. In designing the step-down facility, the two Singapore-based companies are applying the Association of Banks in Singapore guidelines for responsible investing. Sustainalytics, an independent sustainability ratings firm, will assess Wilmar’s performance during the tenor of the loan. If Wilmar achieves the loan’s sustainability criteria, OCBC will decrease the loans’ interest rate.

Initial Chain Reaction Research analysis – led by Profundo – suggests that if Wilmar meets or exceeds OCBC’s performance criteria, the resultant interest rate differential could range between 10 to 60 basis points. Even a 10 basis point change would materially impact Wilmar’s future cost of capital calculations. In fact, companies integrating sustainability criteria into their borrowing practices could achieve higher enterprise values than companies who do not integrate sustainability criteria into their borrowing practices. But lenders require robust independent third-party monitoring and verification.

Since March 2017, ING (amongst others) has been leading global efforts to link lending to sustainability criteria. ING has provided sustainability-linked loans monitored by Sustainalytics to Philips (medical equipment), Olam, Wilmar, DSM (specialty chemicals) and VolkerWessels (construction).

These “green” loans – including OCBC’s loan to Wilmar – represent the first stages of greening the secondary bank loan market. This market pools loans with similar credit profiles, sizes, and tenor into collateralized loan obligations (CLO). Banks then sell CLOs to investment managers to free up bank capital for other lending activities.

LeveragedLoan by S&P Global reported last week that Permira Debt Managers is set to launch the market’s the first green CLO. In March 2018, Permira made its its €362.5 million Providus I vehicle compliant with environmental, social, and governance (ESG) criteria.

Concurrent to OCBC’s loan to Wilmar, Wilmar has also launched an online tool to help Malaysian suppliers meet the Malaysian Sustainable Palm Oil (MSPO) national certification criteria. Wilmar’s Supplier Reporting Tool (SRT) supports suppliers in their efforts to achieve MSPO certification along with Wilmar’s No Deforestation, No Peat, No Exploitation (NDPE) policy.

Wilmar has 24 palm oil refineries in Indonesia and Malaysia with a total annual refining capacity of 18.2 million metric tons. Wilmar is one of the five largest refineries in Indonesia, who alongside Musim Mas, Golden Agri-Resources, Apical and Best Group, account for 66 percent of Indonesia’s total refining capacity. Similarly, Wilmar is also one of the five largest refiners in Malaysia – with Mewah, IOI Corporation, Felda Global Ventures, and Sime Darby – who in total account for 60 percent of Malaysia’s total refining capacity.

In the past year, Wilmar engaged with TH Plantations – the large publicly-traded Malaysian palm oil producer with a 102,000 hectares (ha) landbank that is 73.84 percent owned by Lembaga Tabung Haji. Wilmar’s engagement successfully halted deforestation activity at TH Plantations’ PT Persada Kencana Prima concession.

In addition to palm oil and haze concerns, Singaporean banks have now begun to implement the Singapore Exchange’s sustainability criteria, including reviewing over USD 2 billion in coal lending over the past five years. OCBC does have public sector screening information related to deforestation. This follows up on the Association of Banks in Singapore (ABS), which represents 161 foreign and local banks, new guidelines incorporating environmental, social, and governance criteria into member banks activities. These guidelines include criteria on greenhouse gas emissions, deforestation, and labor standards.

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