Chanel designs a fashionable bond

Marcus Ashworth / Bloomberg SEPTEMBER 25 | Updated on September 25, 2020 Published on September 25, 2020

The luxury brand issues its inaugural $700 million euro bond

It’s important in the fashion world to make a big entrance and Chanel is doing just that with its inaugural 600 million-euro ($700 million) euro bond. It has chosen to issue debt that’s linked to environmental sustainability targets; the bond includes a penalty if the company doesn’t live up to 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 won’t incur any penalty for failing to hit its environmental targets.

In attaching green strings to its bonds, Chanel is following the example set last year by Italian utility Enel SpA and more recently Novartis AG, a Swiss drugmaker. The five-year tranche will repay at 100.5 per cent of face value on maturity if the company isn’t wholly reliant by then on renewable electricity, and the 10-year tranche will cash out at 100.75 per cent if Chanel falls short on its greenhouse gas emission targets.

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.

A prized name

Chanel is interesting in that it doesn’t have a credit rating and it probably won’t be eligible for the European Central Banks and the Bank of England’s giant bond-buying programmes (the company is based outside the euro area and yet the debt was issued in euros). As things stand, Chanel’s UK-issued notes won’t benefit either from the ECBs 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.

While coronavirus has taken a toll on the luxury industry, Chanel is in fashion’s premier league with more than $12 billion of net sales in 2019. The bond market has rewarded that. The price on the deals five- and 10-year maturity was tightened by 25 bps to 95 and 125 bps points over their respective benchmarks, giving an implied rating that's 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 pounds ($765 million) of Covid loans it has repaid to the BOE. So we probably shouldn’t 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 Wertheimer) about an initial public offering or sale. Even if that isn’t the intention, it doesn’t hurt to have a profile in the debt markets.

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Published on September 25, 2020
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