Spanish telecoms company Telefonica drew orders of over €7bn to its single-tranche sustainable hybrid on Wednesday, maintaining the quick pace of ESG hybrid supply in the euro primary market in recent weeks.
Some €2.75bn of ESG-labelled hybrids had been issued in under a fortnight before Telefonica (Baa3/BBB-/BBB) tapped the market for €1bn with its perpetual non-call 8.25-year. The broad demand for the bonds allowed leads to fix the yield at 2.375%, well through where bankers placed fair value.
There was, however, some debate about how negative the final concession was. If fair value was extrapolated from the borrower’s green €500m 2.502% non-call May 2027s it sits around 2.40%, whereas if investors were looking at the more liquid ‘conventional’ €1bn 3.875% non-call September 2026s it could be seen around 2.70%, said a banker.
Regardless, the investor demand for the notes was substantial and driven by themes that remain core to the euro primary sector – appetite for ESG debt and the search for yield.
“Of course, you have the ESG element. That provides an extra level of liquidity and we did receive orders from ESG-committed accounts,” said the banker.
“And then just look at the senior market; everything is so tight. Telefonica is probably a core name in most European portfolio managers' holdings. They know it well, so it makes sense to go down the capital structure.”
In addition, Telefonica had concurrently launched a capped tender offer for its €1bn 3.750% subordinated bonds due to reach their call date in March 2022, another dynamic which typically helps drive demand towards a new issue. Together with Wednesday’s deal, the transaction is expected to be S&P equity credit neutral.
Utilities with high levels of ESG investments are increasingly considering the issue of labelled hybrid bonds as a means of funding projects while maintaining credit ratios appropriate for their ratings, say bankers, as demonstrated by Iberdrola on Tuesday and EDP a week before.
However, with projects such as the modernisation of broadband networks and the deployment of broadband in underserved places aligning with the UN’s Sustainable Development Goals, this is a route equally appropriate for telecoms companies.
“For us, they have always been a very viable sector for social bond issuance at the very least,” said an investor.
The social element of Telefonica’s SDG framework allows the company to use proceeds from a sustainability bond to finance projects such as expanding broadband coverage in rural and isolated areas and funding programmes that invest in start-ups and SMEs.
Green categories include energy efficiency, under which 5G deployment falls, as well as renewable energy projects and saving energy through the use of digital projects, such as AI, ‘big data’ and the ‘internet of things’.
Proceeds from the latest issue will largely be directed towards energy efficiency, funding the network transformation from copper to fibre optic.
Telefonica’s hybrids are rated Ba2/BB/BB+ and the new bond was run by BBVA, BNP Paribas, Bank of America, Credit Agricole, CaixaBank, HSBC, Mizuho, MUFG, NatWest Markets and UniCredit.