Investors question the green tint of Teva’s $ 5 billion sustainable bond

A $ 5 billion “sustainability-related” bond sold by Teva Pharmaceutical Industries on Tuesday was the largest of its kind, but immediately sparked questions from some investors over its environmental and social claims.

Sustainability bonds have grown rapidly in recent years, allowing companies to lower their borrowing costs to meet certain agreed targets. Teva, an Israel-based pharmaceutical company, will aim to increase access to medicines in poor and middle-income countries and reduce its greenhouse gas emissions.

The $ 5 billion raised was a record for a lasting bond, according to data from Refinitiv. The debt will be spread over four banknotes, two in euros and two in dollars.

The bond differs from a green bond, which companies use to raise funds for specific projects deemed environmentally friendly. Instead, Teva will use its new debt largely to pay off other unpaid debts that fall due next year.

Some investors have pushed back the deal, saying there is little transparency about how debt is used and only minor consequences if the company does not meet its sustainability goals.

“This bond offers a step in the right direction, but leaves investors wondering about the real teeth behind it,” said John McClain, portfolio manager at Brandywine Global Investment Management. “The cost of failure is minimal.”

Teva separately received a boost on Tuesday when the company, along with Johnson & Johnson, Endo International and Allergan, won a case related to the opioid addiction crisis in the United States. A California court ruled that there was insufficient evidence that the companies’ promotional activities had led to medically inappropriate prescriptions.

The court ruling bolstered Teva’s debt and stock prices and the new sustainability bond was oversubscribed, with strong investor demand allowing the company to lower its borrowing costs from where the debt was. initially offered to buyers and increase the size of the bond from $ 4 billion to $ 5 billion.

Kare Schultz, CEO of Teva, said it was the first generic pharmaceutical company to launch a sustainability bond that included goals for access to medicines.

“That makes perfect sense, because what does Teva bring to the world?” It is a really affordable and high quality drug. That’s what you do when you make generics and biosimilars, and we do more of them than anyone, ”he told the Financial Times.

The company’s targets include a 25% reduction in direct and indirect greenhouse gas emissions by 2025, citing 2019 as the base year. It also aims to increase access to drugs “given or offered” to low- and middle-income countries by 150% compared to the doses made available in 2020, according to its bond prospectus.

Teva will be assessed in May 2026 to determine whether it is meeting the targets set by the bond agreement, according to people familiar with the terms. Its borrowing cost will increase by 0.15 percentage point for each missed target on the two shorter 5.5-year bonds, and will increase by 0.125 percentage point per year from November 2026 until the maturity of the other two. obligations.

“The way it works is we set those goals and we say we’ll stick to them. If we don’t meet them, we pay a penalty on the bond, which basically means investors get a penalty from us if we don’t meet the targets, ”Schultz added.

But investors noted that the penalty would only apply for a short time and could be avoided altogether if Teva refinances the debt early. It also amounted to less than $ 10 million per year in additional interest on the total amount of debt.

“I’m not sure these sustainability bonds have a place in environmentally focused funds,” said Charles Portier, portfolio manager at environmentally focused fund manager Mirova. “We couldn’t buy this bond. It does not fit into our fund.

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