Hong Kong Emerges as Hub for Chinese Firms Seeking ESG Loans

(Bloomberg) -- Chinese companies have long turned to Hong Kong for foreign-currency borrowings. This now includes a corner of the green-debt market that's helping to stanch the city's overall slowdown in corporate lending.

Mainland firms last year obtained $6.7 billion of so-called sustainability-linked loans, which tie interest rates to corporate sustainability targets. Nearly 40% of the facilities were syndicated in Hong Kong, according to data compiled by Bloomberg. 

The two SLLs signed by Chinese corporates this year, involving ESR Cayman Ltd. and Haier Group Corp., were syndicated in Hong Kong. That's also expected for a coming deal from Syngenta Group Co., anticipated to be one of Asia's biggest-ever ESG loans.

Hong Kong's growing business in SLLs is helping offset sluggishness in the overall loan market. They're 27% of the $13.7 billion of signed corporate lending this year by borrowers in the international finance hub, according to Bloomberg-compiled data. Last year, SLLs accounted for 9% of the city's $65.4 billion of corporate loans. 

Private-sector builders have been key to the $3.7 billion of signed SLLs so far in 2022, but the latest deal was a HK$4 billion ($510 million) loan to a government entity overseeing the development of a cultural district. 

“Companies in Hong Kong that used to have a wait-and-see approach have become much more active in sustainable finance,” said Rose Kay, head of local corporates at Standard Chartered Bank in Hong Kong. “We foresee a strong pipeline of issuance in Hong Kong this year from both local and Chinese companies.”

While still viewed as a niche segment within sustainable finance, SLLs are growing quickly in the region. Such borrowing by Asian companies outside of Japan last year was $52.6 billion, more than six times that in 2020. Australia and Singapore were the top markets for SLLs in 2021, followed by China and Hong Kong, according to Bloomberg-compiled data.

Hong Kong has been working to establish itself as a top green-finance locale. The government is currently selling its first retail green bond, a deal potentially as large as HK$20 billion. It's also established a grant program to cover some costs for sustainable financing of at least HK$100 million. 

“Hong Kong has always been a go-to market for Chinese companies to get capital in foreign currencies, and it is good to see large Chinese corporates taking large amounts of loans with sustainable elements,” said Adnan Meraj, co-head of Asia Pacific syndicated and leveraged finance at Bank of America Corp.

A typical SLL offers the borrower a reduced interest rate if agreed-upon sustainability targets are met. Setting of those goals is overseen by a bank acting as the loan's sustainability coordinator or structurer, but “each lender should perform their own evaluation as to the borrower's credentials and commitments,” said Jonathan Drew, managing director of ESG solutions at HSBC Holdings Plc.

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