EU deforestation law: fire on the horizon for soy traders

13 minute read

In April 2023, the European Union adopted a regulation to remove deforestation from its supply chains. The regulation requires companies selling products to Europe that include commodities such as soy, palm oil, beef, or timber, to prove that they do not contribute to legal or illegal deforestation globally.

We examine how bondholders exposed to leading soy traders can assess financial risk arising from the regulation and consider whether the market is already pricing in such concerns.

There are three main takeaways. Firstly, The EU regulation on deforestation is a material risk for soy producers’ investors. Furthermore, the EU may extend the regulation from deforestation to other ecosystems. Credit deterioration and higher borrowing costs could be significant for investors.

Secondly, these heightened risks do not appear to be reflected in current credit spread levels. It would be strategic for investors to review investments before the regulation is enforced, which could drive a pricing adjustment.

Lastly, amongst large investment grade issuers, American agribusiness Bunge, with $2.9 bn bonds outstanding, appears the most exposed to a potential spread repricing.

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