OCBC Bank has closed a sustainability-linked interest rate swap with Far East Hospitality REIT on June 9.
The 2.5-year, $85 million structured derivative transaction aims to provide a hedge against interest rate risk related to Far East Hospitality REIT’s sustainability-linked loan facility, which was secured from OCBC Bank in March.
This means Far East Hospitality REIT can now fix its interest rate for the loan during the duration of the swap.
The move comes as OCBC looks to increase its offering of sustainable products to corporate and institutional clients, amid the largely limited number of sustainability-linked products across the derivatives market.
While there is growing interest in the area, most sustainability-linked interest rate swaps are step-ups, which imposes heavier interest rates on companies that are unable to meet their sustainability goals.
In OCBC Bank’s swap, its global treasury’s corporate sales and structuring team offers a solution in the form of a step-down instead.
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That is, should Far East Hospitality REIT meets its sustainability targets, it would enjoy a lower rate.
The trust has a portfolio of 13 properties in Singapore comprising nine hotels and four serviced residences. This includes landmarks in Singapore such as the Oasia Hotel Downtown.
“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,” says Gerald Lee, CEO of the manager.
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Kenneth Lai, OCBC Bank’s head of global treasury, says he 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,” he adds.
Units in Far East Hospitality Trust closed 0.5 cent lower or 0.8% down at 59 cents, while shares in OCBC closed 9 cents lower or 0.7% down at $12.36 on June 9.
