Investors question green tint of Teva’s $5bn sustainability bond

A $5bn “sustainability-linked” bond sold by Teva Pharmaceutical Industries on Tuesday was the largest of its kind, but drew immediate questions from some investors about its environmental and social claims.

Sustainability-linked bonds have rapidly grown in recent years, allowing companies to lower borrowing costs for meeting certain agreed objectives. Teva, an Israel-based pharma company, will aim to increase access to medicine in poor and middle-income countries and reduce its greenhouse gas emissions.

The $5bn sum raised was a record for a sustainability bond, according to data from Refinitiv. The debt will be split across four notes, two in euros and two in dollars.

The bond differs from a green bond, which companies use to raise money for specific projects deemed environmentally worthy. Instead, Teva will use its new debt largely to repay other outstanding debt that comes due from next year.

Some investors pushed back on the deal, saying there is little transparency into how the debt is used and only mild consequences if the company falls short of its sustainability objectives.

“This bond offers a step in the right direction, but leaves investors questioning the real teeth behind it,” said John McClain, a 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 US opioid addiction crisis. A California court ruled there was not enough evidence that the companies’ promotional activities had led to medically inappropriate prescriptions.

The court decision buoyed Teva’s debt and equity prices and the new sustainability bond was oversubscribed, with strong investor demand allowing the company to reduce its borrowing costs from where the debt was originally pitched to buyers and increase the bond’s size from $4bn to $5bn.

Kare Schultz, Teva’s chief executive, said it was the first generic pharma company to launch a sustainability-linked bond that included targets for access to medicines.

“It makes all the sense in the world, because what is it that Teva contributes to the world? It’s really affordable, high-quality medicine. That’s what you do when you make generics and biosimilars, and we do more than anybody else,” he told the Financial Times.

The company’s goals include a 25 per cent reduction in direct and indirect greenhouse emissions by 2025, citing 2019 as its baseline year. It also aims to increase access to medicines “donated or tendered” to low and middle-income countries by 150 per cent compared with doses made available in 2020, according to its bond prospectus.

Teva will be assessed in May 2026 on whether it achieves the goals set by the bond agreement, according to people familiar with the terms. Its borrowing cost will rise 0.15 percentage points for each objective missed on the two shorter, 5.5-year bonds, and increase by 0.125 points a year from November 2026 until maturity for the other two bonds.

“The way that works is that we set these targets and we say we will live up to them. If we do not live up to them, we pay a penalty on the bond, which basically means that the investors get a penalty payment 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 refinanced the debt early. It also amounted to less than $10m a year in additional interest on the full amount of the debt.

“I am not sure these sustainability-linked bonds have any place in environmental-focused funds,” said Charles Portier, portfolio manager at the green-focused fund manager Mirova. “We couldn’t buy this bond. It does not fit in our fund.”

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