Russian aluminium giant Rusal is getting ready to issue more sustainable debt after hitting key performance indicator targets on its US$1.085bn sustainability-linked loan despite the coronavirus crisis. It is considering a range of instruments, including a sustainability-linked bond issue.

Rusal will be monitoring the markets from September for a window to refinance more debt into a sustainable format, after seeing the margin on its sustainability-linked pre-export financing loan drop by 15bp to 210bp over Libor in July as a result of hitting its KPI targets.

The company is even ready to issue green bonds tied to a specific use of proceeds if market conditions allow.

"Rusal is very well positioned for ESG-linked debt instruments, so we continue monitoring markets for potential new transactions, maybe in the form of public debt like green bonds," said Oleg Mukhamedshin, Rusal’s director for strategy, business development and financial markets.

However, competitive pricing on the loan is also encouraging Rusal to consider issuing another sustainability-linked instrument – either loans or bonds – that link its financing costs to performance against KPI targets.

"We are ready to consider any type of sustainability-linked financing; we’re just looking for an appropriate window for that type of placement," Mukhamedshin said.

The outstanding US$1.085bn five-year pre-export SLL was issued in October 2019 and was the first from a Russian company. It was designed to highlight Rusal’s commitment to low-carbon technology and "green" aluminium production, as most of its products are produced with hydropower.

"This sustainability-linked loan reflected the market support for Rusal's sustainability issues, and is also in line with rising global demand for low-carbon aluminium," Mukhamedshin said.

The deal had three KPI targets: to increase sales of Rusal’s "Allow" low-carbon aluminium brand, reduce its carbon footprint and to decrease fluoride emissions. All targets were achieved or exceeded on the loan’s first annual test in July, and the 15bp sustainability discount will last until mid-2021.

AMBITIOUS TARGETS

Hitting targets during a global pandemic inevitably raises questions around the ambition of those targets.

Beyond that basic outline, Rusal did not disclose details of its KPIs, but said that it has ambitious and dynamic targets that change over time, in line with a recent push for more challenging ratcheting targets in the loan market.

"The target levels vary year after year, which is reflected in the agreement," Mukhamedshin said.

Rusal said that it was able to hit them as it had continued aluminium production throughout the crisis. Reduced demand and lower aluminium prices caused a net loss of US$76m in the first half, but the company is confident of meeting 2020 targets.

The ambition – or otherwise – of KPIs is currently a major focus for a market that has not seen an SLB for nearly a year after Italian utility Enel issued the first two such trades in late 2019.

SUPPORTIVE

One loan banker was broadly supportive of Rusal’s sustainability claims and strategy on the pre-export SLL.

"Aluminium is an incredibly high energy production process and a company that's running off a higher degree of renewables, such as hydropower, is better than a company using coal," the loan banker said.

But a bond banker pointed out that Rusal would have to be provide more disclosure if it aims to tap an SLB or a traditional green bond.

“If you do a use-of-proceeds green bond, you need a pretty good story around that ... aluminium is a dirty manufacturing process,” the bond banker said.

Aluminium is a recyclable building material, but developing low carbon "green" aluminium is critical to reduce the 4% share of global CO2emissions that makes aluminium one of the seven highest-emitting sectors.

Rusal claims to be one of the world's top low-carbon aluminium companies as most of its smelters use hydropower. About 90% of its aluminium is produced using electricity from renewable sources, which is supplied by hydraulic power plants in Siberia.

Hydropower production typically produces around two tonnes of CO2 emissions to produce one tonne of aluminium, while smelters that rely on coal-fired electricity can produce up to 18 tonnes.

“[Green] is a big thing for them. It feels like something they are focused on,” the bond banker said.

DELEVERAGING DRIVE

Rusal is trying to lower its borrowing costs by refinancing with more sustainable debt as it pushes ahead with plans to deleverage its balance sheet and reduce debt, which stood at US$6bn at the end of June.

"Our ultimate target is to improve our existing financing terms. Now we have such a successful loan raised with a low margin, we are definitely looking at an opportunity to increase that type of financing for refinancing purposes," Mukhamedshin said.

The company is keeping its options open for now as ESG continues to gain ground in Russia, with support from the central bank for green bonds, and interest from the Moscow exchange, as well as a growing market for ESG ratings.

"We have yet to define which type of green instrument is the most suitable for us, but we're definitely looking at all the existing alternative options," Mukhamedshin said.