Uruguay SLB: market update

8 minute read

Uruguay (ticker URUGUA) has issued its inaugural Sustainability-Linked Bond (SLB) with an innovative symmetric step-up/step-down structure. At inception the bond seemed to trade fairly flat to the vanilla debt curve. Since then, the bond has outperformed its closest vanilla bond.

We evaluate KPI data from Uruguay, and use our option pricing model to analyse new data points on the relevant KPIs, to understand if changes in expectations around the coupon steps could be a driver of this bond's performance. In January we analysed the bond, and estimated an option value of -1.8bp, suggesting investors would expect the coupon to step down.

We find that the option value has moved significantly, as GHG emissions have been rising and SPT looks less likely to be achieved. This should have delivered an outperformance of 0.86% to SLB investors compared to an equivalent vanilla bond.

Pleasingly, the change in option value matches the observed relative performance between the Uruguay SLB and its closest vanilla bond issuance in Q1, which validates our option pricing approach.