Here we go Orlen: SLBs step back down

4 minute read

PKN Orlen, a prominent Polish oil refiner and petrol retailer, has two outstanding SLBs with unusual structures in that their KPIs are continually observed. Their unique dynamics came into focus earlier this month, when they became the first bonds to see a coupon step-up reverse following an improvement in sustainability performance.

Each bond tracks the issuer’s MSCI ESG rating. Their coupons step-up if this rating deteriorates, and step-down if it reverts. On 6 February, MSCI upgraded Orlen’s rating from BBB to A, triggering a coupon step-down, reversing a step-up incurred when the company was downgraded back in December 2021.

The market response was nuanced. The PLN 7y SLB experienced spread widening vis-a-vis the nearest maturity EUR bond following the rating change, but as the spread between these bonds has been volatile – and the step-down is only 10bps – it is hard to be definitive about the cause.

However, this kind of step-down event is a world first, and another indicator of the SLB market’s maturation. It also underscores how a continuously observed KPI – in this case, the MSCI rating – can incentivise issuers to make enduring improvements to their sustainability performance over the life of their outstanding bonds.

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