Chile sustainability-linked bond: Optionality analysis

10 minute read

Chile’s SLB issuance (CHILE 4.34 03/2042; ISIN US168863DY16) was, in our view, constructed on a set of robust KPIs – in our terminology a step-up priceable SLB (SUP) – where the separation of the two KPIs to individual step-ups is commended.

The structure accounts for the trajectory of GHG emissions rather than measuring a single point in time as Chile did with its carbon budget, which seems an interesting and sensible way to go. We price the option value of the two GHG emissions KPIs to around 0.5 and 0.3bps individually, or 0.7bps jointly.

In this piece, we discuss the renewable energy KPI and comment that it is not step-up priceable, as there are simply too few data points to produce probability forecasts, but that this should not be a material pricing issue given the high correlation between energy mix and GHG emissions KPIs.

The relatively small optionality value in the Chile SLB illustrates a general point in this space: with a low coupon-step up value, and relatively short maturities over which the step-up could crystallise, there is limited premium that could be harvested and convertible into lowered cost-of-capital for the issuer. Issuers with robust structures like Chile are likely to benefit cost-of-capital wise from pushing bigger coupon step-ups.