ESG firsts pepper corporate primary

6 min read
EMEA
Ed Clark

It was a day of ESG firsts in the European corporate market on Thursday with Pearson printing an education-focused social bond and BASF selling an inaugural green bond from the chemicals sector.

Green and social bonds from corporate issuers are in high demand as the investor pool expands and supply is yet to fully recover from the onset of the Covid-19 crisis.

"The demand for corporate green bonds remains as high as in the past, if not higher, as new green bond funds continue to be created and need to invest, and corporates provide diversification and some yield pickup," said one DCM banker.

"It is obvious that a few green projects have been postponed due to the crisis, but this will eventually catch up in H2, as corporate finance teams can refocus."


PEARSON PIONEERS EDUCATION

The new sterling bond from UK publisher Pearson (Baa2/BBB-) marks the first corporate social bond to announce use of proceeds focusing on educational projects.

"We believe that this is the first ICMA-aligned public corporate social bond which is solely linked to education," said a banker.

"There have been examples in which supras have included mention of education in broader social frameworks and I believe there have been some examples of local currency issuance in Asia."

Proceeds from bonds will be used primarily to fund projects that help achieve the UN's fourth sustainable development goal of "Quality Education".

The framework has a second-party opinion from Vigeo Eiris, which said the company has already selected three projects that will help with access to essential services and education, and socioeconomic advancement and empowerment.


CHEAPER STERLING

The company opted to tap the sterling market for its new bond after announcing on Tuesday that it was considering either the euro or the UK currency.

"It is cheaper for them plus sterling is more of a natural currency so they don't need to worry about swaps," said a second banker.

"Traditionally, sterling is a longer dated market for this kind of credit. The euro market would naturally go out to seven or eight years for this and then the pricing curve would probably be quite steep from there."

The issuer had considered a sterling deal between seven and 10 years and on Thursday brought a June 2030 at IPTs of Gilts plus 400bp area. Terms also include a 125bp coupon step-up should it be downgraded to below investment-grade by Moody's or S&P.

With a book of £3.7bn and the size set at £350m, the deal was more than 10 times subscribed. The spread was fixed at 355bp.

While marking Pearson's first ESG bond issue, it is not the company's first foray into the wider ESG debt market. In 2019 the company became the first education sector borrower to take out a KPI-linked loan.

That deal drew some criticism for not being ambitious enough, with one KPI linked to education, which was already an integral part of its business.


CHEMICALS FIRST

Thursday also saw BASF become the first borrower from the chemical sector to issue green bonds, having established its new green finance framework.

"It's not a typical name you would see in the green bond sector because maybe some investors could have reservations about the industry as a whole," said a third banker.

"But that's why you do the framework and have the meetings, to answer those questions. The proof will be in the book."

And indeed the market showed little reservation about the June 2027 green bond, initially putting in orders of €4.3bn.

Although books dropped to over €3.25bn, the issuer was still able to set the spread at swaps plus 50bp. The spread landed well inside the 90bp IPTs, and left no remaining premium.

The company also sold a conventional June 2023 at swaps plus 40bp, again paying no concession and raising a book of over €2.5bn. Both tranches were sized at €1bn.

"It is hard to tell right now whether the skew towards the longer tranche was because of the green element or because there is a preference among some for longer dated issues at the moment," said the third banker.


BETTER TONE

EssilorLuxottica (A2/A) brought three new tranches on Thursday and saw books peak around €10.9bn, as it demonstrated the improved sentiment in the wider euro high-grade corporate market.

"I think with subscription rates back up and some fairly decent tightening in deals, you can say the market has a pretty decent tone at the moment, better than it was before we had a break," said a fourth banker.

In a similar fashion to BASF's trade, demand skewed towards the longest tranche: a €1.25bn June 2028 which saw orders exceed €4.2bn, allowing leads to set the spread at 75bp over swaps.

The borrower also sold €500m January 2024s at 55bp and €1.25bn January 2026s at 70bp.

The combined books finished at €8.6bn.

Such a large outing in the bond market is a rarity for the corporate although in November it sold a four-tranche euro deal totaling €5bn. Proceeds from that bond were used to fund EssilorLuxottica's acquisition of Dutch opticians group GrandVision, as well as refinancing GV's debts.

Cash from the new issue is earmarked for general corporate purposes.