On Friday October 20, Uruguay issued its first sustainability-linked bonds (SLB), with a step-down mechanism that is activated if it reaches certain environmental targets. The purpose is to align the country’s sovereign debt policy with its climate goals by issuing a bond that links the coupon to compliance with the climate and environmental goals that the country set in its first Naturally Determined Contribution (NDC) to the Paris Agreement.
The issue attracted 188 investors from Europe, Asia, the United States, and Latin America, of whom 21% are new holders of Uruguayan debt. Total demand for the bond was US$3.96 billion, greatly exceeding the US$1.5 billion Uruguay decided to issue. The yield spread between this bond and the US Treasury bond used as a benchmark is 170 basis points. If the bond’s goals are met, its spread will narrow by up to 30 basis points.
“Thematic bonds focused on achieving the objectives of the 2023 sustainable development agenda can bring major benefits for debt management in the region. This first step-down bond issue shows the market’s explicit recognition of Uruguay’s commitment,” said Matías Bendersky, Inter American Development Bank Representative in Uruguay. “This bond issue marks a milestone in Uruguay, and it reflects the country’s commitment to multi-sector work on climate action, which we have backed since the beginning of its first energy transition,” he added.
Last week, the Japanese credit rating agency R&I raised the rating of the Uruguayan sovereign debt note in foreign currency to BBB+ with a stable outlook. This is the highest credit rating in Uruguay’s history. In its press release, the rating agency cited the country’s strategic commitment to de-carbonizing its economy as one of the factors that influenced its rating.
The issue operation was helped by the IDB Group with a strong track record of supporting the development of green markets and sustainability bonds in Latin America and the Caribbean. The IDB has supported Uruguay’s first energy transition since 2007, and it is now backing the second one. Starting in 2019, the IDB and the country accelerated their environmental partnership, focusing on climate action. However, this is the first time the IDB has backed a sustainability-linked sovereign bond. The cost of servicing the debt issued via this instrument will depend on whether or not Uruguay meets the goals of its NDC.
This bond issue is the product of a substantial multidisciplinary and inter-ministry effort. The Ministries of Environment, Industry, and Energy and Mining actively participated and cooperated to achieve the issue, in coordination with Uruguay’s Budget and Planning Office. All members of the National Response System for Climate Change and variability (SNRCC) were also involved.