The new KPI bonds
While structured equity was late to the ESG party, with the first green convertible bond by a European company only arriving in 2020, it caught up quickly. When EDF printed its convert in September it was the biggest green bond from a European corporate in any format. Yet it was the world’s first sustainability-linked convertible bond from Schneider Electric that most advanced ESG issuance.
Introducing the sustainability-linked format into structured equity made strategic sense in a way that moved beyond the arguments of inadequate KPIs and piffling penalties with which straight bond and loan equivalents had struggled.
At €650m Schneider’s fundraising was no minnow, though the cost of not meeting the KPIs was a paltry 0.5% one-off payment that is a rounding error against a five and a half year tenor. This lowly cost was in line with the latest SLBs, but bankers involved said focusing on the penalty was to miss the differentiator that structured equity introduced – equity exposure.
There are three KPIs relating to the CB. They are linked to CO2 emission reduction; the proportion of women in management positions; and number of underprivileged people the company trains in energy management programmes.
Javier Pollan, head of EMEA equity-linked at joint bookrunner Citigroup, said the reason to opt for the equity-linked structure rather than a straight bond is because Schneider’s management “believe there is a high correlation between their stock price and their achievement of those KPIs. So having an instrument which is pure fixed income was missing the angle of creating a connection between the KPIs and the share price performance”.
That argument enabled Schneider to secure a 50% premium on the zero-coupon bonds, very aggressive terms, and should trigger a trend of SLCBs in addition to, or in preference to, SLBs and SLLs.
They will not want for demand. The leads opted not to pre-sound the deal, a relatively rare move now in equity-linked, especially considering the market volatility in November (even if it was positive vol around vaccines).
“Schneider is a prestigious issuer,” said Thierry Petit, head of equity-linked for EMEA at BNP Paribas, which was sole global coordinator. “When you do a pre-sounding, you are taking a two-day market exposure, one to pre-sound and the other to launch the deal. We wanted to avoid a situation where, if the market was sharply down on Monday and we had already started pre-sounding but decided not to go ahead, that would have created a mess for Schneider.”
The decision was the right one. Investors largely treated the deal as a vanilla CB when valuing the bonds. But buyers certainly took note of the ESG credentials when it came to sizing, with several orders in excess of €100m for Schneider’s €650m issue.
Barclays and Societe Generale were also bookrunners on the CB.
* Corrects deal size
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