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Chanel's green bond comes with penalty if targets missed

By choosing to issue debt linked to environmental-sustainability targets, the luxury brand is to be applauded for avoiding charges of greenwashing.

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Chanel's five-year tranche will repay at 100.5 per cent of face value on maturity if the company is not wholly reliant by then on renewable electricity. Chanel achieved carbon-neutral status in 2019.

IT IS important in the fashion world to make a big entrance - and Chanel is doing just that with its inaugural 600 million-euro (S$961.8 million) euro bond.

It has chosen to issue debt linked to environmental sustainability targets, and this bond includes a penalty if the company falls short of its green goals.

The famous French luxury brand, headquartered in London now, is showing up its British rival Burberry, whose sterling-denominated sustainable bond last week was a regular green issue. That one will not incur any penalty if the company fails to hit its environmental targets.

In attaching green strings to its bonds, Chanel is following the example set last year by Italian utility Enel, and more recently, the Swiss drug-maker Novartis.

The five-year tranche will repay at 100.5 per cent of face value on maturity if the company is not wholly reliant by then on renewable electricity; the 10-year tranche will cash out at 100.75 per cent if Chanel falls short on its greenhouse gas emission targets.

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The company is to be applauded for avoiding the "greenwashing" criticism that can be levelled at other so-called "sustainable bonds". It achieved "carbon-neutral" status last year as part of its efforts to support the Paris climate-change agreement.

Chanel is interesting in that it does not have a credit rating and it probably will not be eligible for the giant bond-buying programmes of the European Central Bank (ECB) and the Bank of England (BOE). (The company is based outside the euro area, although the debt is issued in euros.)

As things stand, Chanel's UK-issued notes will not benefit either from the ECB's plan to start buying sustainability-linked bonds next year. But it was still able to cut the coupon on offer during the sale process, and it secured strong demand anyway. Appetite for any kind of yield is still fierce among debt investors, and Chanel is a prized name for a debut bond sale.

In the 'investment-grade' bucket

While coronavirus has taken a toll on the luxury industry, Chanel is in fashion's premier league, with more than US$12 billion of net sales last year. The bond market has rewarded that. The price on the deal's five- and 10-year maturities was tightened by 25 basis points to 95 and 125 basis points over their respective benchmarks, giving an implied rating comfortably within the investment-grade bucket. Demand for the bonds was respectable at nearly three times the deal size.

Having previously relied on private debt and bank loans, Chanel is coming to the public markets to refinance some of the £600 million (S$1.05 billion) of Covid loans it has repaid to the BOE. So we probably should not read too much into what the bond debut says about the controlling Wertheimer family's plans for the company. There has been speculation - denied by the family - about an initial public offering or sale. Even if that is not the intention, it does not hurt to have a profile in the debt markets. BLOOMBERG

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