UltraTech Cement has priced a US$400m 10-year sustainability-linked bond, the first such offering from India.
The 2.8% bonds priced at 99.611 to yield 2.845%, equivalent to Treasuries plus 167.5bp.
The spread was at the tight end of final guidance of Treasuries plus 170bp, plus or minus 2.5bp, and well inside initial guidance of 210bp area.
The company is the largest cement producer in India and sells 1.6 billion bags of cement per year. It is part of the blue chip Aditya Birla group, which includes Hindalco Industries and Vodafone Idea.
As a debut issuer with expected ratings of Baa3/BBB– (Moody's/Fitch), leads looked at other Indian investment grade paper. UltraTech priced around 1bp inside state-owned Indian Railway Finance Corp’s 2.8% 2031s, which were seen at a bid spread of 168bp.
The environmental angle gave an extra appeal to a credit from a carbon-intensive industry and enabled it to print a larger deal than its US$300m minimum target. The production of cement requires limestone to be heated and mixed with materials like fly ash and granulated blast furnace slag, which are byproducts of coal-fired power plants and the steel smelting process respectively.
Under a Sustainability Performance Target, UltraTech aims to emit no more than 557kg of carbon dioxide for every ton of cementitious material it produces by March 31 2030, which would be a 22.2% reduction from March 2017. The company decreased the amount of CO2 it produced by 2.8% between 2017 and 2020.
The coupon will step up by 75bp if the company misses its sustainability target.
"Given there is a financial penalty when issuers can’t achieve their KPIs, up-front investors might be willing to trade off a few basis points in terms of pricing," said a banker away from the deal.
In its other environmentally friendly targets, which are not connected with the bonds, UltraTech is aiming by 2023 to replenish six times the amount of water its operations consume, and for its concrete production to be carbon-neutral by 2050.
Unlike green bonds, issuers of sustainability-linked bonds are not required to specify an environmentally friendly use for the bond proceeds.
Proceeds will be used for refinancing around US$214m of existing rupee-denominated debt, with the remainder for ongoing capital expenditure requirements and general corporate purposes.
JP Morgan was the sole global coordinator and sustainability-linked bond structuring agent for the 144A/Reg S offering. The bank was also joint bookrunner with HSBC.
The bonds were seen slightly wider in secondary trading, at Treasuries plus 169bp.