Uruguay issues global SLB

The Uruguayan Ministry of Economy and Finance (MEF) and the Inter-American Development Bank (IDB) collaborated to develop the framework for the country’s first sovereign bond with a price linked to sustainability metrics.

Uruguay issued its first sustainability-linked bonds (SLB) on October 20. If Uruguay meets specific environmental goals, a step-down mechanism will be activated. By issuing a bond that relates the coupon to adherence to the climate and environmental goals that the government outlined in its first Naturally Determined Contribution (NDC) to the Paris Agreement, the MEF seeks to harmonise the nation’s sovereign debt policy with its climate goals.

A total of 188 investors, including 21% new holders of Uruguayan debt, participated in the offering from Europe, Asia, the United States, and Latin America. The $1.5 billion Uruguay chose to issue was far outstripped by the $3.96 billion total demand for the bond. This bond’s yield differs by 170 basis points from the benchmark US Treasury bond. The spread on the bond could decrease by up to 30 basis points if the objectives are achieved.

“Thematic bonds focused on achieving the objectives of the 2023 sustainable development agenda can bring major benefits for debt management in the region. This first step-down bond issue shows the market’s explicit recognition of Uruguay’s commitment,” said Matías Bendersky, IDB Representative in Uruguay. “This bond issue marks a milestone in Uruguay, and it reflects the country’s commitment to multi-sector work on climate action, which we have backed since the beginning of its first energy transition,” he added.

The Uruguayan government debt note in foreign currency’s rating last week increased to BBB+ with a stable outlook by rating agency R&I. In Uruguayan history, this is the highest credit rating. One of the elements that affected the grade, according to the rating agency’s press release, was the nation’s strategic commitment to decarbonising its economy.

In Latin America and the Caribbean, the IDB Group has a proven track record of promoting the growth of green markets and sustainability bonds. Since 2007, the IDB has backed Uruguay’s first energy transition, and it is currently supporting the second. The IDB and the nation accelerated their environmental engagement in 2019, concentrating on climate change. But this is the first time the IDB has sponsored a sovereign bond with a sustainability component. Whether Uruguay achieves the objectives of its NDC will determine the cost of servicing the debt issued through this instrument.

This bond issue is the result of a substantial cross-ministry and multidisciplinary endeavour. In collaboration with Uruguay’s Budget and Planning Office, the Ministries of Environment, Industry, Energy, and Mining actively participated and worked together to resolve the issue. Additionally included were all participants in the National Response System for Climate Change and Variability (SNRCC).