L&Q Incurs Penalty on $400 Million of Bonds as ESG Target Missed

(Bloomberg) -- London & Quadrant Housing Trust has missed a key emissions target, triggering a penalty that will require it to pay a higher interest rate on £300 million ($401 million) of its bonds.

The UK housing association said on Friday it had failed to cut its so-called Scope 1 and 2 greenhouse gas emissions by the targeted 20% relative to a 2020 baseline. Scope 1 and 2 refers to emissions tied to an issuer’s own operations, and excludes those of clients and vendors.

The increase in emissions is “partly due to a temporary pause in buying renewable electricity” amid soaring prices triggered by “widespread disruption to the wholesale energy markets” in 2022, L&Q said in its sustainability report. “This coincided with the cost-of-living crisis and meant we had to make tough decisions on budgets everywhere.”

The lapse means the coupon on L&Q’s sustainability-linked bonds will increase to 2.125% from 2%. The news drove up the price of the bonds affected by the coupon step-up, relative to L&Q’s other traded debt. The group also embeds ESG targets into most of its secured term loans and revolving credit facilities. 

Five years after the first ever SLB was issued, a growing number of the securities are now bumping up against potential trigger events as environmental, social and governance targets are tested. Uncertainty over whether an issuer will meet a goal can jolt bond prices. 

The SLB market saw its biggest trigger event to date earlier this year after Enel SpA missed emissions targets embedded into over $20 billion of its debt. The Italian energy firm said the miss reflected the European energy crisis caused by Russia’s invasion of Ukraine. 

L&Q was the first housing association in the UK to issue an SLB. The terms of the debt required it to meet three separate targets to avoid higher borrowing costs. L&Q had flagged to investors it was likely to miss the emissions target in a statement earlier this year. 

“When the potential miss was originally flagged to the market in March, bond prices didn’t react,” said Josephine Richardson, head of research at the Anthropocene Fixed Income Institute, which has been monitoring the bond. “As the value of this is realized, that would translate into an immediate tightening of the bond spread.”

The housing association confirmed on Friday that it met the other two goals relating to improving the energy efficiency of its houses and building affordable new homes. 

(Updates with market impact and quote from AFII’s Richardson from fourth paragraph.)

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