VodafoneZiggo is set to put a new spin on sustainability linked structures, bringing the first deal that would see the borrower repay bondholders less should it meet its targets.
The €2.1bn-equivalent transaction, which is reopening Europe’s high-yield primary, will not only include the now standard coupon step-up, but also a redemption amount adjustment. Should the issuer meet the relevant targets, the amount that the borrower will have to repay if it calls the notes will be reduced.
In the event that the two underlying targets are met, the redemption amount will be decreased by 0.125%. This feature has the potential to test high-yield investors’ commitment to ESG issues.
Many have already expressed cynicism concerning the ambitiousness of high-yield issuers’ KPIs. Now, not only do investors stand to miss out on a coupon stepping up, but they could see a reduction in the amount they receive when the bond is redeemed which could prove to be a sticking point. However, the redemption adjustment could also be viewed positively, as it provides additional incentive for the borrower to meet its targets.
“We have previously been quite concerned [about SLBs] because we sometimes see them trading tighter than normal issues,” said one portfolio manager. “So if that coupon step-up is just compensating for some kind of greenium then they might not have much of an incentive to meet these targets. It is kind of a free pass.”
Ziggo’s sustainable financing framework includes two targets for KPI-linked instruments. The company is looking to reduce Scope 1 and 2 emissions by 50% by 2025 and Scope 3 emissions by 50% by 2025. Both are set against a 2018 baseline.
Both of these must be met to trigger the adjustment in redemption amount.
The coupon step is also linked to these targets and each KPI features a 12.5bp coupon step-up if missed.
With the 10-year non-call five bonds, Ziggo is looking to finance the early redemption of its US$1.6bn 5.5% January 2027s and €600m 4.25% January 2027s. An investor call for the Dutch telecoms provider’s new issues is being held today, January 5.
IPTs of 5% area for the new dollar bonds and 3.5% area for the euros were announced through physical bookrunners Bank of America (B&D), Credit Suisse and JP Morgan. The bonds are expected to be rated B1/B+/BB.
Seeing a European high-yield deal emerge during the first week caught some off guard, but given the nature of the Ziggo credit, bankers said that it made sense for them to be getting into the market early.
“The treasurer is probably thinking ‘well if this week is going to be quiet then it gives us more visibility, so why wait until it is more crowded next week?’ and they are a well followed name that is big and liquid and most people will have to be involved,” said a high-yield banker.
And market participants expect that, assuming the SLB structure does not cause too much upset, the transaction will see a good take up.
“There was a little bit of market fatigue towards the end of last year,” said a second banker. “A lot of people felt like they had had a decent year and didn’t want to be a hero in the last week of December. When you get to January, you typically have quite a strong window and investors are very engaged.”
Opportunistic refinancing exercises, such as Ziggo’s, are expected to be a big driver of issuance early in the year.
“If people are nervous about the rate environment, if people think the Fed is really on a serious tightening strategy and that is going to lift the rest of the yield curve then any of the refi trades being considered, especially in dollars, are going to be pushed through sooner rather than later,” said the first banker.