Contingent Resilience-Linked (CORL) bonds: combining public and private capital for resilience

25 minute read

AFII introduces a new concept, contingent resilience-linked (CORL) bonds, which combine sustainability-linked features with credit enhancement, as a way to incentivise issuers to reach resilience targets and highly encourage much-needed private capital.

The development community is struggling to mobilise private finance to deliver the United Nations’ Sustainable Development Goals (SDGs). Private investors are increasingly keen to adopt environmental, social and governance (ESG) criteria and deliver impactful investment, but a lack of consistent incentives means that development finance institutions (DFIs) are failing to stimulate SDG-aligned private capital. The CORL bond provides a potential solution.

The structure enables DFIs to provide credit enhancement, if an issuer reaches its resilience or sustainability targets. By using an option-pricing approach for Sustainability-Linked Bonds (SLB), we show that it is possible to structure step-down SLBs with fixed coupons priced at the same level as equivalent vanilla bonds.

Importantly, this means that with relatively modest credit enhancement, CORL bonds can be structured to offer sizable and incentivising step-downs. They are attractive to investors, while the concessionary capital commitment remains small.