Ares Management Corporation, the largest private debt manager in the world according to affiliate title Private Debt Investor, has written a ground breaking £1 billion ($1.4 billion; €1.2 billion) direct loan with a margin linked to ESG targets, the firm will announce today.
This is the first time the firm has included ESG-linked terms in a direct loan, and it is the “largest private credit-backed sustainability linked financing to date”, the firm said in a statement seen by New Private Markets.
Funds managed by the firm’s European direct lending platform are serving as sole lender on £1 billion of facilities to RSK Group, a UK-headquartered environmental and engineering business. The deal is notable both for its size, which is unusually large among direct lending deals, but also for its sustainability angle. The facilities include an annual margin review based on the achievement of sustainability targets “which are broadly focused on carbon intensity reduction and continual improvement to health and safety management and ethics,” the firm said. Ares declined to go into specifics about the metrics, but Mike Dennis, partner and co-head of European credit, told NPM that they were developed “in partnership with the management team” and based “around their sustainability agenda”.
RSK anticipates interest savings in excess of £500,000 per year and has committed to donate a minimum of 50 percent of the margin benefit toward “sustainability-related initiatives or charitable causes”, the firm said in its statement.
The inclusion of sustainability targets has become an increasingly prominent feature of the European leveraged finance market, but less so in direct lending, where there is as yet “no real market standard”, said Dennis: “We wanted to get out there and lead the market.”
The firm had to carve out its own approach for this deal, said Adam Heltzer, managing director and global head of ESG for Ares: “While we researched the market, details for these deals tend to remain private. In terms of guidelines, there are principles out there, but they are relatively high level.”
ESG-linked margin ratchets will not become a ubiquitous feature of Ares’ direct lending activity – at least not in the short term, said Dennis. “We will incorporate more of these types of ratchets in our loan documentation, where appropriate. However, it may not be relevant for every deal we do for a variety of factors.”
“If you look at the leveraged loan market, this started with a trickle and now around a third of the facilities in the European market have ESG-linked ratchets,” said Heltzer. “I wouldn’t be surprised if in two to three years’ time we see increased penetration in the direct lending space.”
As a business operating in the sphere of environmental sustainability, RSK is a well-suited candidate to integrate ESG targets into loan terms. “It’s about finding the right combination of lender and borrower,” said Heltzer. “We loved the fact that RSK has a mature, well-developed sustainability programme, [but] we can see working with a borrower at an earlier stage of ESG maturity as well. We would like to work with a range of companies to broaden our impact and accelerate sustainability programmes of all kinds.”
The sustainability KPIs will be verified by a third party, said Heltzer, which is best practice according to guidelines in the market. Ares declined to disclose which fund the deal came from.
Ares had assets under management of $248 billion as at 2 August 2021. The firm’s Europe-focused ACE V is the private credit industry’s largest ever direct lending vehicle, having closed on €11 billion in April this year.