UK sustainable/green issuers this week & recap of JapTob & NBG...
Tesco, Just Group are two of the notable issuers issuing in the sector
Tesco Plc renewed a £2.5bn committed credit facility with links to sustainability targets (Link to statement). I believe Enel was the first big corporate issuer to issue a similar instrument but in bond format, back in Q4 2019 (ITALIAN ENERGY COMPANY ISSUES GROUNDBREAKING SDG-LINKED BOND - BNP)
The Tesco facility uses Risk Free Rates and interest linked to the achievement of three environmental targets. Tesco is set to benefit from a lower interest rate loan margin if the company delivers environmental targets:
Emissions: % reduction of Scope 1 and Scope 2 CO2e emissions
Renewable Energy: % renewable electricity sourced from on-site generation or from the grid under Power Purchase Agreements
Food Waste: % food surplus safe for human consumption redistributed to humans or animals within UK operations
Furthermore, Tesco has transitioned the Facility away from LIBOR with multiple interest periods linked from day one to the Sterling Overnight Index Average ('SONIA') and to the Secured Overnight Financing Rate ('SOFR') for GBP and USD respectively.
So, an innovative transaction overall. No pricing is mentioned, however my guess is that it would be at a cheaper cost of capital than what they would have extracted from more traditional financing methods, otherwise why go to the hassle? The current cheaper financing cost of “ESG” type bonds vs conventional funding methods has longer term implications for the cost of capital of firms that have access to this source of finance.
Just Group, a UK listed financial services firm specialising in retirement products and services successfully launched its first “Green” Tier 2 this week. According to Bloomberg, the company will invest the proceeds from its green bond in environmentally friendly projects including renewable energy and clean transportation.
Other Key highlights:->
Benchmark Deal (£250m)
7% Coupon
£250m (no-grow) April 2031 non-call April 2026 transaction
£1bn of demand
Source: IFRE (Excellent article..)
According to the IFRE article, £1bn order books are not that commonplace in the sterling credit market (which I can agree with anecdotally). Book-runners on the deal “attributed the growth in Just Group’s audience partly to the deal’s green element.” (Source: IFR again)
In my opinion, the “no-grow” aspect plus the large coupon and BBB (flat) rating would have ticked the boxes for a lot of accounts, which would have also led to the success of the deal, and has seen the bond trade to the small premium in the secondary.
Looking across both deals, it shows that the market is open to well structured issues from both large cap and small / mid cap space in green format.
Recap of recent deals in the ESG and “not-so-ESG” space
In a previous post I touched upon the Japan Tobacco Hybrid and the CCC+ rated* National Bank of Greece inaugural green Bond. So how have the two performed?
Well, the longer call Japan Tobacco Hybrid is up 8 points and the shorter one around 4.5pts (as at 11 Oct 2020). Meanwhile the NBG Green bond is still stuck around issue price. Some takeaways from these two bonds:
Not all Green bonds will perform
There is a price for everything - A combination of attractive spread + solid rating + mega cap cap issuer status can quickly help some investors get over the fact that it is not issued from an ESG-friendly sector.
Credit markets are global and different investors have different motivations - While in DM markets, green bonds and ESG are gaining major traction, I believe it will take longer in EM and Asia. As such, the fact the JAPTOB bond originates from the Tobacco sector will not be as bigger a problem for them. Folks investing from EM/Asia - feel free to correct me in the comments section!
*Composite Rating
——Not investment advice, I may hold positions in the Issuers mentioned——