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Adidas added sportswear to the recent surge in ESG-related debt from clothing manufacturers on Tuesday, diversifying a supply line that had previously consisted of luxury names.
And the borrower proved that large spread reductions and negative concessions are still possible, even if conditions are not what they were at the start of the month.
Sustainable debt from the clothing sector has rapidly taken off in Europe since the first issue from Burberry earlier this month, underpinned by several supportive factors including a growing awareness of sustainability issues among the customer base and wider institutional initiatives such as the UN Alliance for Sustainable Fashion.
"And, increasingly, the sustainable finance market has opened up for operating expenditures focused sustainable bonds – which clearly represent the main expenditures for this sector," said Arthur Krebbers, head of sustainable finance, corporates, at NatWest Market.
Adidas's inaugural sustainability bond follows Chanel and Burberry, which this month have sold a euro sustainability-linked bond and sterling sustainable use of proceeds bond respectively.
SQUEEZING PRICING
The German sportswear manufacturer (A2/A+) was able to achieve a healthy reduction in spread on its €500m no-grow October 2028 sustainability bond, and according to leads came away with a negative concession.
BNP Paribas, Commerzbank and JP Morgan fixed the spread at 40bp, well inside the 75bp-80bp IPTs. Books peaked at above €3.5bn.
Using the corporate's two bonds issued earlier this month as comparables, one lead suggested fair value somewhere in the high 40s.
Adidas's 0% September 2024s and 0.625% September 2035s were bid at 37bp and 61bp respectively pre-announcement. Those two notes, issued at the start of September, were the borrower's first bonds issued as a rated corporate.
Whether the price progression was purely a product of the ESG label or rather a combination of being the most highly-rated corporate in the market on Tuesday, one of only two ECB-eligible borrowers among the five corporate names issuing and the heightened demand for ESG assets, is hard to say.
However, the consensus was that there has been an upswing in interest among investors in ESG debt from the corporate sector and this is translating into a reduction in spreads for some deals.
"We’ve seen on things like Daimler the saving that it can generate and I would say even for Adidas here at a much lower spread and yield it was worth 5bp at least, as the sustainable buyside money tends to be stickier in the book as they want those assets," said a syndicate banker.
SUSTAINABLE FASHION
A growing focus on sustainability issues and financing by the fashion industry is seen as fundamentally important by opinion providers given the issues surrounding the sector.
The industry is the second largest-polluting sector in the world, responsible for about 10% of annual global carbon emissions, according to Sustainalytics.
The average person, meanwhile, purchases around 60% more items of clothing every year and keeps them for about half as long compared to 15 years ago.
Adidas's use of proceeds cover a variety of issues.
These include the purchase of fabric containing recycled polyester, financing the sourcing of cotton certified to the Better Cotton Initiative standard, funding the purchases of material created from upcycled ocean plastic waste, financing the transport packaging composed of 100% recycled materials and financing investments in recycling technologies.
Sustainalytics acted as opinion provider, confirming the framework's alignment with ICMA's Sustainability Bond Guidelines.
Additionally, it highlights the framework's 24 month look back period compared to a market standard of 36 months. This helps to deal with potential accusations that the framework was too skewed towards older initiatives.
Adidas had been a strong performer in regards to sustainability issues even before the new issue. That could arguably lead to claims that the new ESG financing would make little positive impact on the company's performance.
For example, the UoPs include financing the purchase of sustainable cotton. Yet as far back as 2018 the company announced that all of the cotton it uses was sustainably sourced.
This is not necessarily an issue, but something investors must consider on a case-by-case basis.
"Use of proceeds bonds can of course include categories that represent business as usual practices, including sustainably impactful operating expenditures. In such cases though, investors will likely challenge the company around the additiveness of the sustainable bond," said Krebbers.
"If this is not reflected in operational changes, then this could be through the disclosures, tracking and governance inherent in the sustainable bond."