Affinity Water embarks on sustainable finance journey with Lloyds Bank

In summer 2020 Affinity Water appointed Lloyds Bank as its Sustainable Coordinator, arranging a £40m Sustainability-Linked Loan. Almost a year later, we hear from Group Treasurer Nilesh Patel about how the facility is working and the benefits it has brought for both Affinity Water and their customers.

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Read time: 4 mins      Added: 08/04/2021

As the largest water-only company in the UK, providing water to over 3.6 million customers across the south-east of England, sustainability is high on Affinity Water’s agenda.

As well as facing challenging sustainability targets from regulator Ofwat, the company has recently reshaped its purpose to place a greater focus on environmental concerns, pledging to provide high-quality drinking water, while helping to take care of the environment. So, when Affinity Water was looking to refinance, a green solution was high on their list of requirements.

“We were looking for a finance solution that worked well with our green ambitions,” says Nilesh. “But we also needed flexibility and a facility which would last at least three years and be future-proofed for the cessation of LIBOR at the end of 2021.”

A sustainable solution

A £40 million SONIA-linked revolving credit facility was established, with the bank acting as Sustainable Coordinator, tasked with setting bespoke KPIs which were drafted into the loan agreement.

Nilesh Patel, Group Treasurer , Affinity Water

The KPIs relate to carbon emissions, water abstraction, water leakage and vulnerable customers and are set at a stretching level in accordance with the Loan Market Association’s (LMA’s) Sustainability-Linked Loan Principles and Affinity Water’s ambitious zero carbon targets.

Under the terms of the loan, Affinity Water will benefit from reduced margins if three or more of the targets are met, and incur penalties if just one or none are achieved. The targets will also apply across a number of other facilities across multiple lenders.

“We worked really closely with Lloyds Bank and as an external coordinator they were able to ensure that the targets set were going to be really valuable and challenging, but also realistic,” says Nilesh. “Their sector knowledge and own sustainability experience meant they were able to take a step back and say, ‘Actually, what have we seen on other facilities? What do we expect a borrower to achieve in this sector?’ which was incredibly useful.”

Working with Lloyds Bank

Conversations around Affinity Water’s finance facility and the Sustainable Coordinator role first started taking place as the country was locking down in March 2020, which added an extra challenge. However, a proactive approach and wealth of sector experience helped the process run smoothly.

“The environment wasn't seamless, but working closely with Lloyds Bank made everything a lot easier,” says Nilesh. “Having the bank in the Sustainable Coordinator role made things a lot simpler - we're only talking to one bank and their measures get cascaded throughout other facilities.

“Lloyds Bank’s knowledge of the sector and their openness to be SONIA linked on day one also helped - it means we don’t have further challenges to tackle down the line. They were also just very good in terms of being proactive, having open conversations with us and setting us the targets that they think we should be looking at.”

“We’re one of the largest lenders to the UK’s water and utilities industry – working with around 90% of the sector,” says Tahir Chaudhary, Relationship Director, Lloyds Bank. “We’ve been working closely with Affinity Water since 2012 and our knowledge of their structure, the regulatory environment they operate in and our broader sector experience, mean we were well-placed to take on the Sustainable Coordinator role.”

Looking to the future

A year on from starting their sustainable finance journey, Affinity Water are exploring more opportunities for green lending.

“When it comes to sustainable finance, this facility was the first part of the puzzle,” says Nilesh. “We're keen to consider additional sustainable financing when we approach the market in the future. So, for example, when we do require more funding in the bond market, I can see sustainable finance being a part of that.

“It also sends a clear message to our customers about our purpose. Customers know that the environment is important to us, and we're always striving to improve the environment in terms of our activities. They can rest assured their provider is an ethical company, a sustainable company, and doing everything they can to maintain that.”

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