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Poland’s first green IRS transaction – Santander Bank Polska and Tauron Polska Energia

IRS (Interest Rate Swap) is a transaction hedging the risk of interest rate volatility. The instrument prepared for Tauron as the first in Poland is based on the principles of sustainable development. This means that if Tauron achieves better environmental indicators, the interest costs on its liabilities will be lower.

A company that uses the „green IRS” is motivated to incorporate environmental goals into its business model. For an energy producer, these will be: lowering CO2 emissions and increasing energy production from RES. In return for meeting these conditions, the company receives tangible financial benefits, in the case of Tauron it will be a reduction in the fixed interest rate paid.

Environmental and climate aspects are increasingly taken into account when financing and assessing the risk of a given investment. SDG (Sustainable Development Goals) and ESG (Environmental Social, Governance) indicators also play a special role and are taken into account when designing new products or financing offers to encourage and support entrepreneurs in their transformation efforts. Our aim is to support the domestic energy sector in its transformation to a zero-emission system. That is why we provide our customers with solutions that help them do this, taking into account the specifics of our market. We are pleased that Santander Bank Polska is the first financial institution in Poland to have carried out a transaction hedging interest rate volatility risk based on the principles of sustainable development.

comments Paweł Szczepaniak, from the Treasury Services Department at Santander Bank Polska.

This is another stage of Santander Bank Polska’s cooperation with Tauron. In October 2020, the bank became the coordinator, lead arranger and bookrunner of the issue of the first sustainability-linked bonds for the company, worth PLN 1 billion. Both transactions, which were the first of their kind in the Polish market, will help the company in its transformation to carbon-free energy. Santander Bank Polska takes the challenges that the energy sector will undoubtedly face in the coming decades very seriously. That is why it actively participates in the financing of 'green’ projects in this sector and also creates solutions enabling energy companies to achieve ambitious goals.

Tauron’s Green Turnaround is a strategy that has been in place for a year and a half. Its main objective is to radically change the Group’s generation structure while drastically reducing CO2 emissions. In 2030 we want to generate two thirds of our energy from renewable sources and reduce emissions by half. This is an ambitious goal that requires flexible and diversified financing. We see that the financial sector provides new solutions and we are taking advantge of them.

explains Marek Wadowski, Deputy President of the Management Board of TAURON Polska Energia.

What is the 'green IRS'?

IRS is a transaction hedging interest rate volatility risk, where the client swaps payments based on a floating index (e.g. WIBOR) for a fixed rate of a specified amount. Such transactions are made in order to hedge the risk resulting from financing based on a floating rate, e.g. loans or bond issues. Before entering into the transaction, the client bears an interest

cost based on WIBOR and a credit margin. WIBOR can change and grow over time, causing interest costs to rise. Thanks to the IRS transaction, the company knows the amount of the costs it will incur throughout the entire security term.

The modification of the transaction implemented by Santander Bank Polska has been to make the IRS conditional on sustainability principles. An additional financial incentive was introduced in the form of a reduction of the fixed interest rate. However, in order for such a reduction to be achieved, Tauron will have to fulfil the applicable terms which were agreed before the transaction was concluded and will be monitored on an annual basis. If the terms are met in a given year, the interest rate will be reduced by the agreed value, for the next year.

The Polish economy, like many European economies, faces the challenge of green transformation. Contractors, individual customers and investors are becoming increasingly aware of the environmental, climate and social impacts of their activities. Businesses are monitoring their environmental footprint and developing ambitious strategies to reduce it. Therefore, it is to be expected that transactions of this type, such as the „green IRS” or instruments like Sustainable Development Bonds, will appear more and more often on our market.