Streetwise: Why shipowner savings on ESG-related loans have been ‘tokenistic’ so far

When Eagle Bulk Shipping of Connecticut released its annual Environmental, Social and Governance (ESG) report this month, one concrete development seemed to stand out from the rest.

Eagle had obtained an interest margin reduction on its $300 million sustainability-linked term loan by meeting certain emissions criteria set out in more detail in its report.

Specifically, Eagle was able to stay below the International Maritime Organization’s Energy Efficiency Operational Indicator, or EEOI, which is the amount of carbon dioxide emitted by one metric ton of cargo moved one nautical mile.

It also spent an agreed minimum, for Eagle a total of $2 million, on ESG-related initiatives, including fleet upgrades.

So good news all around, right?

Well, up to a point. A look at the fine print showed that Eagle’s three-month Libor margin fell to 210 basis points (bps) from the 215 bps it had paid. Had Eagle failed to meet the market, the rate would have hit 220 basis points.

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That’s not a big difference, especially when covenants on the same loan could push Eagle’s margin up to 280 basis points if leverage got higher than it currently is.

Thus, with a range of 70 basis points on the loan, only 10 basis points are related to ESG.

Or as one finance veteran sarcastically put it to Streetwise this week: “Wow, 10 bps. Oops of doo! »

No greenwashing but…

If ESG progress is so important, why aren’t banks providing greater incentives – or punishments – for it?

“I don’t want to use the term greenwashing because I think banks are legitimately pursuing ESG and decarbonization goals,” one business executive said.

“But it looks like they should be offering more incentives if they’re really looking to shape behavior in those areas.”

Bankers approached by Streetwise for opinions on the subject this week weren’t exactly falling over each other to respond. But a few viewpoints on the subject have emerged.

First, the terms of the Eagle Agreement are not unusual for sustainability-linked loans that have emerged to date.

For example, a facility brokered by the Irish owner of commodity carrier Ardmore Shipping contains similar language.

“That’s the norm – that’s the market right now,” said one business executive.

The manager noted that spreads have been much wider on sustainability-linked bonds such as the issue brokered by oil tanker owner Odfjell in January 2021 – that spread is 150 basis points – or another bond deal won. by the container ship operator Seaspan Corp around the same time to 50 basis points.

Modest Earnings, Modest Rewards

Banks don’t offer more relief on lending margins because shipowners don’t offer more, he explained.

“All of this is based on annual emissions reports or AER [annual efficiency rate] and the more aggressive the target is in lending language, the more aggressive the banks can be,” he said.

“Most companies will set an achievable target, but will also keep you on a good trajectory before the IMO targets. If you go well below the IMO trajectory, you can get a bigger discount. But it’s probably going to require some major propulsion changes, so until then everyone is doing the best they can.

Bing Chen is Chairman and CEO of Atlas Corp, the parent company of Seaspan Corp. Photo: Atlas Corp.

The executive also warned that while companies are able to pick the low-hanging fruit to take the first step towards reducing emissions, “the first 10% were easy, but the second 10% will be harder to come by. “.

One seasoned lender who answered the questions took a slightly more jaded view of the current incentives.

“Until now, sustainability-linked lending has been largely public relations exercises for banks and shipping lines,” he said.

Go green or go home

“It’s confirmation for the banks to say we’re on the Poseidon principles and really care about these things, and for the owners to say look, we’re doing something.”

While the market for sustainability has grown in both industries and shipping, the banker sees it as “still almost tokenistic.”

“Right now they really don’t matter that much,” he said.

Still, the growth of the green orientation is undeniable, he said, particularly in the Nordic countries and the banks based there.

“If you want access to Nordea or DNB, you better come in with a green hat, don’t come in with your dirty bunker hat,” he said.

More news on ship financing:

  • Disgruntled investor Ned Sherwood has renewed his attacks on Navios Maritime Partners management over a dividend to shareholders that is not progressing like the rest of the company. Click here to read the story.
  • John Fredriksen’s SFL Corp says a huge building campaign is needed to keep up with demand from car haulers as new fuel efficiency regulations come into effect. Click here to read the story.
  • Florida-based Noble Capital Markets is sticking to its guns in covering shipping research and investment banking despite the defections of two key staff members. Click here to read the story. Click here to read the story.

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