SLBs: no cal(l)amity

22 minute read

A common criticism of sustainability-linked bonds (SLBs) has been around callability, where it is sometimes suggested that bond issuers are pushing this feature into bond structures to wriggle out of sustainability commitments.

Our analysis finds scant quantitative evidence to support this critique.

Overall, when comparing SLBs with similar non-SLB issuances, we observe little ‘excess’ callability in SLBs. The key to this result is to control for sectors, ratings and issue age when comparing SLBs with the much larger market of traditional bonds.

We find that there is no material difference in the proportion of SLBs that are callable compared to similar bonds. The increase of callability in the market, in general, may be a reason it has been perceived that newer vintage bonds, such as SLBs, have ‘more’ callability than older bonds.

SLBs’ first call option dates align with the overall market, as the distribution of call dates relative to final maturities does not differ significantly between SLBs and comparable non-SLBs.

In current market conditions, the value of the call option in SLBs is relatively small, “out-of-the-money”. With interest rates having risen substantially since the original time of issuance for most SLBs, the issuer cost of calling the bonds is materially higher than paying sustainability-related step-up coupons.

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