A $5 billion sustainable-linked bond sold by Teva Pharmaceutical Industries on Tuesday was the largest of its kind but drew immediate questions from some investors about its environmental and social claims.
The sustainability-linked bonds have grown in the past few years, enabling companies to lower borrowing costs for meeting certain agreed objectives. Teva will in order to increase access to medicine in poor and middle-income countries and reduce its greenhouse gas emissions.
The $5 bn sum raised was a record for a sustainable bond, according to data from Refinitiv. Two notes, two in euro and two in dollars will be distributed across the debt.
The bond is different from green bond, which companies use to raise money for specific projects deemed environmentally worthy. Instead, Teva will use its new debt to repay other outstanding debt that comes due from next year.
Some investors said the company falls short of its sustainability objectives, and there is little transparency into how the debt is used and only mild consequences when it falls short of its sustainable objectives.
The bond offers a step in the right direction but leaves investors questioning the real teeth behind it, said John McClain, a portfolio manager at Brandywine Global Investment Management. The cost of failure is minimal. Teva received a boost on Tuesday when the company, along with Johnson Johnson, Endo International and Allergan, won a case related to the US opioid addiction crisis. There was not enough evidence that the companies promotional activities had led to medically inappropriate prescriptions, according to a California court.
The new sustainable bond was over subscribed after the court decision leaked Teva debt and equity prices and the new sustainability bond was over subscribed, with strong investor demand allowing the company to reduce its borrowing costs from where the debt was initially pitched to buyers and increase the bond s size from $4 bn to $5 bn.
Kare Schultz, the chief executive of Teva, said it was the first generic pharma company to launch a sustainable-linked bond that included targets for access to medicines.
It makes aсмыслy in the world, because what is it that Teva contributes to the world? It's really affordable, high- quality medicine. People familiar with the terms say Teva will be assessed in May 2026 on whether it achieves the goals set by the bond agreement. The cost of borrowing will rise by 0.15 percentage points for each objective missed on the two shorter, 5,5-year bonds and increase by 0.125 points a year from November 2026 until maturity for the other two bonds.
We set these targets and we say we will live up to them. If we don't live up to them we pay a penalty on the bond, which means that investors get a penalty payment from us if we don't meet the targets, Schultz said.
If Teva refinances the debt early, the penalty can be avoided altogether if the penalty is applied for a short time. It includes less than $10 m a year in additional interest on the full amount of the debt.
Charles portier, portfolio manager at Mirova, said I am not sure that these sustainable-linked bonds have any place in environmental-focused funds.