Johnson Controls brings Europe's pricing incentives to US ESG loans

NEW YORK, Dec 17 (LPC) - Multinational building systems group Johnson Controls has linked the pricing of US$3bn in environmental, social and governance (ESG) loans to a pricing structure that is more reminiscent of the European model, in that it impacts both drawn and undrawn pricing.

The company is not only one of the first industrial companies to tie pricing to specific sustainability metrics. It is also the first in the US to offer price cuts to borrowers regardless of whether the loans are used or not.

Sustainability-linked loans, which generally backstop commercial paper programs, include incentivized pricing structures based on interest rates reductions or increases depending on their borrower’s ability to meet or exceed preset ESG performance targets.

Because investment grade revolvers have for the most part gone undrawn in the US, previous deals with ESG-related pricing have remained largely non-events unlike in Europe where the pricing incentive applies to both the drawn and undrawn rates.

Not anymore in the US. At least not for Johnson Controls.

“We wanted to give the client an incentive that was tied to the company’s sustainability strategy; while at the same time, providing a meaningful award and not just a discount on the margin, which they won’t incur,” said Anne Van Riel, head of sustainable finance at ING in the Americas.

ING Capital was the sustainability structuring agent on the loans.

The US$3bn included a US$2.5bn five-year credit agreement and a US$500m 364-day loan. Pricing is ratings-based. On the five-year it ranges from 80.5bp over Libor to 120bp over Libor on the margin, and 7bp to 17.5bp on the facility fee. The 364-day ranges from 82.5bp over Libor to 125bp over Libor on the margin and 5bp to 12.5bp on the facility fee.

The interest rate and facility fee for both facilities are subject to upward or downward adjustments if the company achieves, or fails to achieve, certain specified sustainability targets. The adjustments may be up to 4.5bp per year for the margin or up to 0.75bp per year for the facility fee.

Johnson Controls is currently rated Baa2 by Moody’s, BBB+ by S&P and BBB by Fitch.

JP Morgan led the deal. Bank of America, Barclays and Citigroup are joint lead arrangers and joint bookrunners. A total of 18 banks committed to the facilities.

With its two revolvers, which were announced last week, Johnson Controls is prioritizing several Key Performance Indicators (KPI) including goals on employee safety, greenhouse gas emissions reductions from energy efficiency and renewable energy customer projects, as well as greenhouse gas emissions reductions from internal operations.

“While there are a number of transactions that are linked to one KPI or an external independent ESG rating, the three KPIs allowed the company to show commitment to a variety of goals that are at the heart of the company’s business,” Van Riel said.


While sustainable lending is on the rise across the world, with nearly US$103.3bn in global green and ESG-linked loans, the US has lagged. Only 10 US sustainability-linked loans have come to the market so far tallying roughly US$10.5bn, according to Refinitiv LPC.

Banks are targeting the sector as a growth area as they seek to improve their own credentials despite the potential loss of income that lending at cheaper rates could create.

Losing a few basis points is a risk that some banks are willing to take, as the present haircut could eventually mean less exposure to ESG risk in the future and thus to the overall lending risk.

Bankers hope that eventually regulators would take a closer look to ESG lending and introduce other incentives for lending to corporates who pursue environmental and societal goals.

“There is hope by some that, as these become more commonplace, maybe the regulators will also make adjustments to capital such provided that we have clients who have sustainability targets that perform, maybe the banks’ capital requirements would go down.” (Reporting by Daniela Guzman and Michelle Sierra. Editing by Aaron Weinman and Jon Methven) ))