OneMain prints first junk-rated social bond led by D&I bookrunners

IFR 2388 - 19 Jun 2021 - 25 Jun 2021
5 min read
Sunny Oh

Personal loan provider OneMain Financial on Tuesday became the first junk-rated US issuer to sell a social bond and also the first to elevate diversity and inclusion underwriters to joint-lead manager roles alongside bulge bracket banks.

OneMain, rated Ba3/BB–, issued a US$750m 2027 non-call 2.5 senior note to finance personal loans to individuals who lack access to credit either because they have poor credit histories or do not have one at all. And at least 75% of the loans financed by the new notes will go to racial minorities or women.

The deal landed at 3.50%, inside the company's existing 6.625% 2028 senior notes which were last seen trading in the secondary market at a yield of 3.97%, according to MarketAxess data. The offering was upsized by US$250m, with pricing levels tightened from initial guidance in the 3.625% area.

The order book hit US$2.8bn before the deal launched, according to a person familiar with the matter. Neuberger Berman was an anchor investor in the offering.

The bond was also unique in that it was the first high-yield deal to have diversity and inclusion broker-dealers feature in joint lead manager roles. The deal was led by BNP Paribas, Citigroup, Mizuho, R Seelaus, Ramirez, Siebert Williams Shank and Academy Securities. The latter four are D&I firms, which have been making inroads in the investment-grade market with bigger roles in recent months but until now have had little exposure in high-yield issuance.

“[OneMain] have been a supporter of diversity firms and they thought this was an opportunity to elevate this as well by giving the joint lead roles to D&I firms,” said Leslie Graves, co-head of debt origination and syndication at women-owned broker-dealer R Seelaus.

"They have an external reviewer that gives the assurance these proceeds will square with the social bond framework. They're being as thoughtful and transparent as they can be," said Graves.

OneMain had been entertaining the idea of issuing a social bond for a long time.

"We have engaged with OneMain Financial senior management consistently over the course of several years regarding issuing a social bond and are pleased to see the concept come to fruition," said Chris Kocinski, a senior portfolio manager for Neuberger Berman.

ESG push

High-yield investors have shown a growing receptivity to ESG-related bond offerings. The US junk-rated bond market has seen a swell of green and sustainability issuance in 2021, with US$8.08bn of deals so far this year, including OneMain's new bonds, up from the total US$1.8bn raised over 2017–2020, according to IFR data.

“There is incremental demand for this type of structure, and as a result you are able to sell bonds with a lower coupon,” said one high-yield investor.

But the investor said the premium paid for such bonds was small, ranging from10bp to 20bp.

Tom Graff, head of fixed income at Brown Advisory, said a consumer loan provider was an unexpected candidate for a social bond. ESG-focused investors would ordinarily be wary of an issuer from an industry overshadowed by a reputation for making high-interest loans to those who can least afford to pay.

But the social label could be taken as a sign of the company's confidence in its underwriting practices.

“What OneMain is doing is laudable. They’re saying ‘take a hard look at what we do. We think it will pass your ESG standards.’ We should encourage companies to do that,” said Graff. “I doubt a lot of ESG investors are thinking about the personal spending space. It’s getting a new set of people to check the company out."

Though many are willing to give plaudits to OneMain, some have misgivings over the reliability of its funding.

They fret that a temporary shuttering of the asset-backed securities market could leave OneMain vulnerable, unlike a bank that can rely on a largely captive and stable depositor base to weather stormy markets. OneMain makes secured and unsecured consumer loans to individuals and bundles them into ABS.

Concerns around the company's funding mix may point to why the deal priced slightly wider than comparable Double B issuers. The average Double B stood at 3.26% on Tuesday, according to ICE BofA data.

“The moment they don’t have access to the ABS market, you start wondering what will happen to the unsecured bonds,” said one buyside source.