Overall ESG-themed debt volume rose sharply in 2021 to top US$1 trillion equivalent in annual issuance for the first time, according to Refinitiv data. SLL issuance made up the majority of the total as companies seek to align their funding with transition to net-zero emissions plans. In 2021, SLL volume more than tripled from the previous year to reach more than US$700 billion.

Meanwhile, James Poulos, head of loan markets and syndications, Australia and New Zealand at MUFG Securities, tells KangaNews SLL issuance from Australasian companies increased by nearly 150 per cent in the first half of 2022 relative to the first half of 2021. He suggests this foreshadows a significant year-on-year increase by the end of 2022.

SLL growth is being driven by symbiotic demand from borrowers and bank lenders, loan market sources agree. Tim Steven, head of leveraged and syndicated finance at RBC Capital Markets, says: “Conversations on sustainability-linked or green features now arise in a majority of transactions, demonstrating the focus from equity and debt investors.”

The format also continues to develop, notably in the context of the ambition and measurement of SLL targets. “We expect the market to continue to evolve and incorporate higher degrees of rigour as more transactions incorporate these features,” Steven continues.

Tim Bates, head of loan syndication at Commonwealth Bank of Australia, adds: “The SLL format continues to adapt as the market and investor requirements evolve. Market participants probably would not view SLLs put in place in 2019 as robust in 2022. The level of expectations continues to rise, as do the commitments from companies as we seek to continue the evolution to net-zero across the board.”

While the trajectory of growth in SLL volume suggests the format is increasingly becoming an established part of the funding landscape, market users say there is a limit to the proportion of syndicated loans that can incorporate these features.

“The number of SLLs being executed has grown considerably over the past three years and most borrowers now think about the option. But I do not necessarily believe every borrower is going to do every deal as an SLL,” says Gavin Chappell, head of loan syndications at ANZ.

For one thing, M&A activity is one of the primary reasons for corporate borrowers to seek new bank funding – and this type of financing is not particularly suited to the SLL structure, loan market sources say. Event-driven financing typically hinges on pace, and SLLs take time. As a workaround for this challenge, borrowers that cannot develop full SLLs within the required time have begun using ‘sleeper’ conversion features in loans.

Sleeper loans allow businesses with a desire to access the SLL market but that lack time or readily quantifiable targets to deliver ambitious, measurable and achievable KPIs that can be assessed during the life of a facility. Sleeper deal language provides for the conversion of debt to the SLL format if the borrower is able to develop acceptable targets within a specified time period.

“The contingent SLL structure can make sense for event-based transactions as it can be difficult to incorporate specific regimes or targets in the bidding phase of a transaction,” Steven says.

Poulos adds: “We are increasingly seeing M&A transactions in which sponsors ‘bake in’ an element of ESG, such as sleeper clauses or a margin ratchet.”

The emergence of sleeper facilities also ties in with the more holistic approach many entities are now taking in managing ESG factors as reporting levels improve, and borrowers and investors seek new ways to demonstrate progress on sustainability.