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In conversation with Mashreq’s Global Head of Investment Banking Chiradeep Deb: Sustainability-linked finance has picked up momentum in the Middle East and North Africa region over the past two years, helped by not one, but two Cop editions taking place in our corner of the world. Still, the market is considered nascent, and a lot of companies in the region are still in the process of developing an ESG framework that can allow them to tap into this burgeoning debt market, Mashreq’s Global Head of Investment Banking Chiradeep Deb (LinkedIn) told EnterpriseAM UAE.
A company that already had an ESG framework in place and emerged as a great candidate for sustainability-linked finance was Gems Education. Last June, four Emirati lenders — our friends at Mashreq and First Abu Dhabi Bank, as well as Abu Dhabi Commercial Bank and Dubai Islamic Bank — led the financing of a USD 3.25 bn loan for Gems Education, facilitating asset manager Brookefield and its consortium’s acquisition of a majority stake in the Dubai-based school operator — one of the largest private equity transactions in a business in the Gulf.
What we know: The new loan is estimated to have reduced borrowing costs to about 350 basis points over the benchmark, Bloomberg quoted people familiar with the matter as saying. It also reportedly came with a USD 100 mn revolving credit facility to help Gems finance its day-to-day operations, Bloomberg said. Deb could not confirm or deny the specifics of the transaction.
Mashreq was the lead sustainability coordinator, initial mandated lead arranger and bookrunner, and global and conventional facility agent on the transaction. We had a chat with Deb on what went into the process of arranging the facility, determining the KPIs for the sustainability side of the transaction, and his outlook on s-linked finance in the region in the run-up to COP and over the next year. Edited excerpts from our conversation:
Enterprise: Tell us about your work on the transaction. How did negotiations unfold?
CD: You would imagine, putting together the largest private LBO financing in the region was a herculean task and took some time. However, within that we were able to successfully trigger a conversation to link the financing terms to sustainability linked KPIs. We were fortunate enough to interact with a knowledgeable team of people at Gems who already had a companywide ESG framework in place. It took some time to settle on the KPIs, particularly as you might appreciate the data gathering, validation process, and peer benchmarking can be a challenging task.
Gems has thrived in this part of the world. Availability of high-quality school education has been such an important component of drawing in people from different parts of the world into the country. Gems has grown into a very significant brand when it comes to innovation and staying ahead of competition. Internal ESG framework and compliance is very much integral to their existence. It has a wealth of impact metrics tracked internally, which helped enable the structuring of the largest SLL in the region.
As the lead sustainability coordinator, we had constructive discussions around the identified KPIs and continued to challenge the company to commit to higher levels on some key deliverables. We were able to convince them to accelerate in the direction of travel and showcase their ambitious commitment by integrating their sustainability strategy with the financing. That level of engagement required some commitments from their side at the senior management level. They came back very motivated and were willing to accept those challenges.
Those challenges also come with penalties should the institution fail to achieve these deliverables – so it’s a well-thought-out commitment from their side.
E: What types of incentives are you offering them?
CD: Since it’s a 10-year facility, the roadmap is clearly drawn up for each of the KPIs to be tested annually over the life of the financing. As financiers, we needed to ensure that the company sends the right signals to all its stakeholders and mitigates risks. The structure has a reduced margin linked to the achievement of the KPIs; but the company has also committed to increasing the already generous scholarship program with any financial incentives linked to the financing.
From an environmental standpoint, we will target accelerating the adoption of clean energy across schools as permitted by technical constraints, significantly reducing the group’s carbon footprint.
On the other hand, we also needed to focus on the impact of education through the empowerment and qualifications of teachers beyond regulatory and industry requirements to ensure that the Group delivers the right tools to sustain positive behavioral change.
Lastly, and importantly, it was critical to address equitable education. GEMS will streamline and expand a systematic bursary framework to make private education sustainable for all students from diverse backgrounds and to ensure real diversity and inclusion within its offerings.
We incorporated some other gating KPIs, which we had identified along with the three KPIs mentioned, with regards to their environment and social action plan. Not everybody is ready with baseline numbers for emissions, given the fact that sustainable finance has been behind Western peers here in the region, but they’re getting there. They are in the process of collecting baseline data around emission levels and water consumption and they will probably be ready 12 or 18 months down the line. These are linked to their long term decarbonization goals.
So we are building in an incentive for them to do the right thing and align them with the global standards of sustainable linked financing. But more importantly, through a consultative process, we believe we have efficiently brought the borrower and lenders on the same page and provided a segue to use similar objectives to benefit future financings, too.
E: How does Mashreq safeguard itself and monitor the progress of these KPIs?
CD: I believe banks do not want to take ownership of monitoring KPIs. As per the terms of the loan and in compliance with the Sustainability Linked Loan Principles (SLLP), Gems must obtain independent and external verification of its performance level against each sustainability performance target (SPT) for each KPI. This ensures a solid and impartial way to overcome one of the issues we often face, and that is a robust reporting, monitoring, and verification framework.
We agreed, as part of the package, to a sophisticated reporting and monitoring framework to ensure the right environmental and education metrics are captured consistently.
E: Other than leading on sustainability negotiations, what did Mashreq bring to the table on this transaction?
CD: At Mashreq we believe in offering our superior structuring capabilities in the LBO space and lending our balance sheet, to the extent needed, to achieve a swift and efficient closure of the transaction for our key relationship clients. Post the event, we believe in continuing to manage our exposure in a dynamic fashion. An underwritten facility allowed the principal to go and seek out a new institutional investor for Gems.
Now that Brookfield is investing in the business, the transaction is complete from a financing perspective. Four large banks have determined the transaction structure and set the price, tenor, and structural boundaries of the financing. I’m sure many regional banks will find it now palatable to participate in the general syndication of the deal.
E: We’re talking regional banks?
CD: I believe the regional bank market is very deep, and the underlying credit story here is a regional story. It makes more sense from a client’s engagement perspective to engage regional banks than to go to international banks in foreign countries who probably do not appreciate the business that’s being run out of this region as much as the regional banks do — so the objective would be to stick to our syndication strategy to focus on regional banks.
E: Did the transaction drive some interest among Gems’ peers? Or others in the industry?
CD: Conversations around weaving one’s ESG framework into potential financing are commonplace now amongst borrowers and financiers. The education sector probably falls within the top quartile when it comes down to ESG-related initiatives that can be easily understood and efficiently implemented since everything that they do is social first and positive to start with — but it all depends on how they continue that trajectory.
Demand for private education is motivated amongst others by a desire for greater choices and streamlined accountability. However, to ensure equitable access to quality education, providers must weave into their operational DNA several factors to ensure that development objectives can be achieved transparently and efficiently. It is crucial for us to ensure that the objectives of the financing are well aligned with the characteristics of an inclusive, quality education.
We’ve already arranged an s-linked transaction for another school here for a large Dubai-based group, and we’re having multiple engagements with others. We are also speaking to companies across all sectors.
As a bank, we have made a substantial commitment to facilitate AED 110 bn in sustainable linked financing by 2030. Since 2022, we have already coordinated AED 30 bn worth of sustainable finance. We seem to be on track and are urging to engage with more diverse sets of clients and add more to the pool.
E: What’s your view on s-linked finance for the rest of the year? Do you see more pickup until the end of the year, in the run-up to COP29?
CD: The concept of blending ESG into financing conversations is a 12-18-month-old conversation in this part of the world. It has obviously picked up momentum on the back of COP28.
Is it a fad? Definitely not. People are engaged; they are committing resources. Management uses their bandwidth and time to steer these conversations in the right direction.
Banks like Mashreq also have a large role to play. We are supposed to differentiate the level of ESG readiness in our clients and accordingly allocate capital because we want to lend money to businesses that are paying heed to take strides forward. No financing conversation today between [a bank] and the senior management or company owners is complete without a discussion on the ESG front.
I’m very upbeat about the seriousness, depth and commitment of these conversations. We are in a positive spot compared to where we were two and a half years back.
What do we have to guard ourselves against? We just want to make sure that every such instance that we take part in is not “froth,” but has some tangible benefits to the E, and S and the G which can be monitored and reported, and that whatever framework we agree on together is adhered to and is two-way street. It should not be just on paper. And to that extent, the entire ecosystem must come together.
