ISTAT Jetrader - Winter 2022 - 30

LMA AND ICMA SUMMARY OF PRINCIPLES
Principles Author
Loan
LMA Green Loan Principles
Green
Use of Proceeds (UoP) for
specific environmental
purposes (e.g., electricpowered
aircraft)
UoP for specific
Bond
ICMA Green Bond
Principles
Source: LMA, ICMA, Company press releases
environmental purpose
(e.g., electric-powered
aircraft)
Sustainability-linked
Loans in which financial or
structural characteristics
may change depending on
achieving - or not - KPIs/
SPTs (e.g., BA's 8.1% CO2
reduction EETC)
Bonds in which financial or
structural characteristics
may change depending on
achieving - or not - KPIs/
SPTs (e.g., AF Jolco, EY
loan)
Transition
Similar to Green Loan,
but the UoP may be for
something not described
as Green unless it helps in
long-term CO2 reduction
Similar to Green Bond,
but the UoP may be for
something not described
as Green unless it helps in
long-term CO2 reduction
For example, British Airways (BA) issued a EETC in
which the company stated its CO2 emissions per passenger
kilometer would reduce by 8.1% versus its 2019 level by the
end of 2025. The bond was structured such that if should BA
not meet this target, the bond coupon would step up by 25
basis points.
Parties may want to consider that any SLLs/SLBs that
incorporate a step-up feature should donate that step-up
amount to a recognized, registered charity of the lender's
choice, especially aviation-related charities such as Airlink
or Orbis. There is an inherent conflict of interest if the
lender financially benefits should the borrower not meet its
decarbonization targets.
MUFG is a founding member of Impact, a 30-strong group
of aviation financiers that is creating and defining relevant,
measurable standards and KPIs for airlines. There is also
another group, RMI-sponsored Center for Climate-Aligned
Finance, composed of six aviation banks working on a
similar strategy.
Finally, we have transition financing, which is a
challenging one. In short, the proceeds might not be used
specifically for a CO2 reduction project, but it does lead to a
longer-term CO2 reduction strategy. I am only aware of one
deal, a Japan Airlines transaction, in which the proceeds
were used to upgrade to new, fuel-efficient aircraft while not
having any specific KPIs or SPTs. Without specific reduction
targets at the project or company level, many investors may
shy away from such deals.
As the " sourcers " and users of capital work together to
come up with strategies, in the absence of rules and laws
or even common agreement, we need to be as constructive
as possible and focus on the bigger picture: reducing net
emissions. There is devil in the detail: for example, what SPTs
or KPIs should be used, and how impactful are they?
30 * THE OF F I C I AL PUBL I CAT I ON OF ISTAT
Key Factors to Consider:
* Determine your pathway to net zero. There are any
number of pathways one can focus on, but it does
seem that many airlines are coalescing around STBi.
* Create and agree on SPTs and KPIs, and work with
your lenders on financing structures. It seems fair
that if an airline or lessor is going to incur a cost in
reducing its emissions, there should be some benefit
when financing.
* What are the levers? SAF agreements, improved
operational efficiencies, new technology aircraft,
denser seating, air traffic management improvements
and carbon capture, either for sequestration or
conversion to e-fuel.
* Perfection is the enemy of the good. In pursuit
of lower emissions, increased transparency and
reduced complexity help market participants better
understand their options to avoid risk of market
inefficiencies.
* A low-cost carrier will, by very definition, have a
very different profile to that of a full-service carrier.
Targets should be per airline, not per industry.
* We should refer to " aviation decarbonization " not
" aviation sustainability. "
Considerations to Avoid Accusations
of Greenwashing:
* Replacing older aircraft with new ones isn't enough
to ensure a pathway to net zero, and airlines need to
show they are willing to issue financings that have
penalties if they don't meet targets or deliver benefits
if they do.
* Don't expect unproven " paper " models to contribute
at this stage to ESG-compliant financings.
ISTAT Jetrader - Winter 2022

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