China’s Cofco raises $2.1b in country’s first sustainability loan

People visit the COFCO exhibition center during the 14th China Beijing International High-tech Expo (CHITEC) at the China International Exhibition Center on May 18, 2011 in Beijing, China. Bloomberg.

The trading division of China’s biggest food company signed a $2.1 billion loan that links all of its main financing lines to environmental targets.

Cofco International Ltd.’s deal marks the first time a mainland Chinese company has embraced this new kind of financing agreement, known in the industry as a sustainability-linked loan. The deal offers lower interest rates in exchange for meeting targets, such as tracing the origin of its soybeans to ensure they don’t contribute to deforestation in Brazil.

The sustainability linked loan, a concept that barely existed just a few years ago, is another example of how green finance is sweeping across the corporate world, even in some of the biggest-polluting countries like China. Loans with margins tied to borrowers’ sustainability metrics soared 63% in the first half of this year to $44 billion.

“The future demand of agri-commodities can only be met by sustainable sourcing,” said Jing Wu, chief financial officer at Cofco International. “The market is giving us an opportunity to reflect our beliefs and how we do business with a creative financing structure.”

The privately held company estimates savings of about $1 million a year by meeting its targets, and plans to spend that money funding its own sustainability goals, like reducing use of fossil fuels. Critics have argued that these kind of loans amount to little more than “greenwashing” by generating positive attention for companies with little action. For Cofco International, the savings achieved by meeting the loan’s targets are relatively small.

Still, a greener reputation could help Cofco International attract investors, if it ever goes public. Executives at its parent, Cofco Corp., have previously said the trading unit may eventually seek a stock listing.

Loan Details:
  • Three tranches with one- and three-year tenors.
  • It’s priced at 80 basis points above the London Interbank Offered Rate on the one-year tranche and 90 basis points on the three-year tranche.
  • The loan’s margin is tied to Cofco’s ESG rating from Sustainalytics and certain KPI (key performance indicator), offering as much as 5 basis points incentive or premium depending if target is met or not.
  • Information from people familiar with the matter, who are not authorized to speak publicly and asked not to be identified. A spokesman for Cofco International declined to comment on the loan terms.

Cofco’s deal ranks among the world’s biggest sustainability linked loans and the largest in the commodity trading industry. It will replace existing revolving credit and term-loan facilities, making it the first time a commodities trader tied its core source of trade finance capital to green targets.

Other traders including Louis Dreyfus Co., Gunvor Group Ltd., Olam International and Wilmar International have all signed similar loans in the past two years.

Banks are embracing this kind of loan as a way to fulfill their own environmental targets and burnish their image. ING Group NV, Rabobank Group and Banco Bilbao Vizcaya Argentaria SA are the sustainability coordinators of the Cofco International loan. ABN Amro Group NV is the coordinator.

The market is still relatively new, with the first deal struck in 2017, but demand is rising. Volume surged ninefold in 2018. European companies dominate the space and have signed 80% of the loans. Before the Cofco International agreement, there were only three deals from Asia this year, totaling $1.2 billion.

“These are signs that this is not a niche business,” said Jasper van Schaik, the global head of trade and commodity finance at Rabobank in Utrecht, Netherlands. While Western European companies and banks are at the forefront, “this is quickly spreading around the world,” he said.

Bloomberg