PKN Orlen, a Polish oil refiner and petrol retailer, has issued two SLBs with coupons dependent on the issuer’s MSCI ESG rating.
In December 2021, the issuer was downgraded from A to BBB, which triggered a step-up to the coupon on both bonds. While it is not financially material to Orlen, due to the size of the step, this is a significant event for the nascent SLB market.
As the coupon steps were very small, we did not observe a major market reaction to the news. What is clear is that the security worked as expected, which should help to give investors confidence in the robustness of the SLB product.
When there is new information on an SLB trigger, the market reaction tells us how the coupon step compares to the change in market price of the credit risk. If there is no correlation between sustainability performance and credit, receiving an increased coupon is pure upside for investors, and a commensurate yield tightening would be expected. If yields widen on news of a missed target, this suggests that the market expects a larger deterioration in credit than the coupon step will compensate.
No market reaction suggests that the coupon step exactly balances any impact to credit.