Uruguay’s US$1.5bn sustainability-linked bond was one of the highlights of the year in Latin America’s primary bond market and a landmark in sustainable finance as it introduced two-way pricing to the global SLB market.

The 5.75% 2034 SLB issued in October crucially included a coupon stepdown that is payable if Uruguay exceeds its targets to incentivise outperformance in addition to a more customary step-up to penalise underperformance.

Introducing two-way pricing into the SLB market was a major breakthrough. Although symmetric two-way pricing has existed in the sustainability-linked loan market since 2017, bond investors have refused to accept any stepdown structures since the first SLB in 2019.

Uruguay’s determination to turn its so-called Nationally Determined Contributions into financially binding commitments that are aligned with the Paris Agreement on climate change was key to the deal’s success.

Picking a window to issue in a volatile year was also challenging but the deal attracted significant demand with a US$3.96bn order book from188 global accounts, including 40 new lenders.

For the structure to work, Uruguay had to show that its key performance indicator targets – to reduce greenhouse gas emissions and to maintain the size of its native forest area – were truly ambitious.

Failure to reduce CO2 emissions by at least 50% and preserve at least 100% of native forest by 2025 will trigger a typical coupon step-up penalty but Uruguay will only receive a stepdown payment if it reduces emissions by 52% and increases its forest area by more than 3% by 2025.

Uruguay’s innovation sends a signal to borrowers that more affordable finance is available in return for performing – or exceeding – sustainability strategies.