Singapore - OCBC Bank has executed a sustainability-linked interest rate swap with Far East Hospitality Real Estate Investment Trust (“Far East H-REIT”), as the Bank moves to increase its offerings of sustainable products to corporate and institutional clients as part of its broader sustainability drive.

The 2.5-year, S$85 million structured derivative transaction aims to provide a hedge against interest rate risk related to Far East H-REIT’s sustainability-linked loan facility, which was secured in March 2021 from OCBC Bank.  This hedge effectively allows Far East H-REIT to fix its interest rate for the loan during the duration of the swap.

The number of sustainability-linked products across the derivatives market has been largely limited so far, although there is growing interest in this area. Most sustainability-linked interest rate swaps are step-ups, which imposes heavier interest rates on companies which are unable to meet their sustainability goals. In OCBC Bank’s swap, its Global Treasury’s Corporate Sales and Structuring team provided an innovative solution in the form of a step-down. If Far East H-REIT meets its sustainability targets, it would enjoy a lower rate.

Far East H-REIT has a portfolio of 13 properties in Singapore, consisting of 9 hotels and 4 serviced residences. It includes distinctive landmarks in Singapore, such as Oasia Hotel Downtown, which was named the “Best Tall Building Worldwide” by the Council on Tall Buildings and Urban Habitat in 2018, and Village Hotel Albert Court which was awarded the BCA Green Mark Platinum certification by the Building and Construction Authority since 2015 – a reflection of Far East H-REIT’s effort to reduce the environmental impact of its operations.

Mr Gerald Lee, Chief Executive Officer of FEO Hospitality Asset Management Pte Ltd (the Manager of Far East H-REIT), said, “Entering into this sustainability-linked swap reinforces the commitment of Far East H-REIT, with one of the largest hospitality portfolios in Singapore, in contributing towards the conservation of the natural environment by incorporating sustainable practices in our operations. The step-down nature of the swap offered by OCBC further incentivises Far East H-REIT to continue its sustainability practices with potential interest cost savings.”

As the world moves towards a greener economy, the demand for sustainable debt will also increase. According to Bloomberg, the issuance of sustainable debt, including sustainability-linked loans and bonds, increased 30 per cent year-on-year to hit US$732.1 billion in 2020.  But such products have attendant risks in the form of interest rate, foreign exchange and credit. As such, the demand for sustainability-linked derivatives, which help investors hedge their exposure to ESG assets, is also expected to increase substantially in time. Over time, such sustainability-linked derivatives are expected to be a powerful force in mitigating the risks of sustainable financing, as well as developing standards and fostering greater market transparency.

Mr Kenneth Lai, OCBC Bank’s Head of Global Treasury, expects to see more of such sustainability-linked derivatives in Singapore and globally. “With more companies pursuing sustainable finance, we anticipate a growing demand for such sustainability-linked swaps. The transition to a sustainable economy requires a huge amount of funding. These sustainable derivative solutions remove some of the volatility of interest rate or FX fluctuations, while incentivising our clients to meet their sustainability goals.

“OCBC adds value by providing customers with the full suite of tools which are in line with their green ambitions, as well as ours. As a bank, we can be strong drivers for change and we aim to positively influence more companies to pay more attention to sustainability.”