Thai government embarks on SLB journey

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Thailand is set to issue its inaugural Sustainability-Linked Bond (SLB) – the first government in the region to do so. This indicates confidence in the instrument as a means to pursue sustainability ambitions.

The bond is linked to two sustainability performance targets: one connected to the country’s overall GHG emissions, and the other to the registration of new zero-emission vehicles. For each target, a 2.5bps step-up/step-down will apply if they are missed/achieved.

In the context of option pricing and financial materiality, we think a more meaningful coupon adjustment would have enhanced the structure. Because of the small size of the step-up/down, we see very limited potential for optionality being priced at issuance based on our option pricing approach. Therefore, we think it is likely the bond will price broadly in line with the yield curve.

The issuance in local currency supports domestic capital market development, which is important for emerging economies. The previous issuance of sustainability bonds indicates a sufficiently deep capital market and domestic demand for such instruments.