Burberry modelled a series of firsts in Monday's sterling market, selling not only its inaugural bond issue, but also the debut sustainable bond from the luxury goods sector.
The landmark deal caught investors' interest with orders for the £300m no-grow September 2025 quickly reaching £2.45bn.
Although debut issuers and ESG debt often attract strong investor demand, it was not necessarily clear at the outset how strong the response would be.
"With first-time issuers, investors want to know whether they will become regular issuers so that they know it is worth doing all the credit work," said a banker.
"Burberry doesn't strictly need to issue but it is protecting its liquidity through Covid. It is not necessarily convincing to say they will be issuing regularly."
But the focus of the new bond's use of proceeds, as well as the strength of the name, supported robust demand for the issue.
The level of support for the deal also allowed bookrunners HSBC, JP Morgan, NatWest Markets and Societe Generale to substantially revise the spread to land at 135bp over Gilts, from 180bp area IPTs. Only a handful of orders fell away, with the latest update showing a book of over £2.35bn.
"They didn't pick low-hanging fruit, but they are focusing on areas where they still have work to do. In a sense, there is no point focusing on something you are already doing - the question investors should be asking is 'what are they going to be doing that they weren't doing before?'," added the banker.
In its sustainability bond framework the UK fashion house outlines a series of goals around the company, its products and the communities with which it is involved.
These goals include an operational net zero carbon footprint, to procure 100% of cotton more sustainably by 2022 and to positively impact one million people by 2022 via projects that tackle educational inequality, support social and economic development and community cohesion.
Specific projects that the cash raised through the bond issue can go towards include buying and refitting more energy efficient properties, sustainably sourcing cotton and sourcing recyclable packaging.
SUSTAINABLE STERLING
The new bonds also benefited from a swell in demand for ESG assets among sterling buyers, coupled with relatively low supply.
"The sterling investor base is certainly catching up to Europe in terms of ESG," said a second banker. "The same type of liquidity is not available in sterling, but the market appears to be very welcoming of debut ESG issuers."
During the marketing process for the new Burberry bond, one asset manager focused on the ESG sector said he was eager to see the continued growth of sustainable debt in the sterling market.
While borrowers such as publisher Pearson and water utilities Southern Water and Severn Trent have brought new issues this year, the overall supply has remained low, especially in comparison with the euro market, he said.
"It's great diversification for investors, and also from an issuer's perspective, the cost makes sense," said a third banker.
"This was in addition to a decent premium on offer as well. That's probably why it went better than the Coventry deal, for example. Having said that, even at Gilts plus 135bp, I would rather put my pension into a prime UK building society than someone who makes chequered pants."
Coventry Building Society (A2/A-) sold a £250m five-year senior preferred on Monday at Gilts plus 120bp, with final books of around £265m.
REACH AND LIQUIDITY
Earlier in September, Moody's handed Burberry its first-time issuer rating of Baa2, basing this on the brand's global reach as well the company's conservative financial policies.
The agency does, however, consider the corporate's reliance on a single brand, limited product diversification, the high level of competition within the luxury goods market and uncertainty around the company's transformation strategy all as potential risks.
In the fiscal year ending March 2020, Burberry had generated £2.6bn of revenue.
May to June results were severely affected by the Covid-19 pandemic, revenues of £257m indicating a 45% fall compared to the same period during 2019.
Sales did increase as the quarter progressed, and the company has benefited from a strong recovery in China.
Burberry also has strong liquidity. In early September 2020, it had significant cash balances, including the proceeds from its £300m of drawings under its £600m HM Treasury and Bank of England Covid Corporate Financing Facility.
Its liquidity is further supported by access to a £300m revolving credit facility, according to Moody's.