Schneider Electric issues the world‘s first sustainability-linked convertible bonds for €650m

On November 16th 2020, Schneider Electric (SE, €25.2bn revenue in 2020) held an ESG Investor Day to announce it had met its sustainability targets for 2018-2020 and present its new strategy for 2021-2025.

On November 17th 2020, the company – which has been seeking to establish itself as a pioneer in sustainable development for the past few years – issued the world’s first sustainability-linked convertible bonds. The zero-coupon OCEANE bonds were issued for a nominal amount of €650m, with a maturity of 5.6 years (June 15th 2026), a 50% conversion premium, and an issue price at 107.75% of the nominal value, representing a yield to maturity of -1.33% a year, one of the lowest ever obtained by a company. Schneider will use the proceeds of the offering for general corporate purposes.

The company selected three key performance indicators relating to sustainability:

• Climate: helping customers avoid 800 megatons of CO2 emissions.

• Equality: gender diversity among new hires (50%) frontline management (40%) and leadership teams (30%).

• Generations: training one million people in energy management.

The current average score based on these indicators is 3/10 and the target is 9/10.

If Schneider Electric does not meet these targets by December 31st 2025, the company will pay a 0.5% premium on conversion or redemption.

The transaction gave the company an opportunity to gauge market reaction to its Schneider Sustainability Impact strategy while raising capital in favourable conditions. The move is consistent with the company’s innovative, pioneering culture and rewards its longterm efforts (SE is a leader in MSCI rankings, with an AAA rating for the past 10 years). The offering was launched without pre-sounding at 7am in the UK, and was very well received by investors. It was fully subscribed within an hour at the mid-range price.

Pricing guidance was released at 10am in the UK, tightening to 107.75% of the (fixed) issue price and a premium range of 47.5% to 50.0%. The books were closed at 11.30am in the UK after reaching demand of more than €2.2bn, with the offering oversubscribed by a multiple of 3.4, enabling final pricing at the higher end of the revised range.

The quality of the book was high, with more than 130 lines and a 60/40 split between Long Only and Hedge Funds. The UK, France and Switzerland were overrepresented in demand. Schneider Electric’s share price was unaffected at the time of issue and ended the day 0.3% higher. Bonds are already being traded at a premium in the secondary market, at 108.2%/108.3%.

Tableau Four highlights of the Schneider Electric issuance

Innovation

The Schneider Electric convertible bond is the first of its kind to incorporate a sustainability premium. The offering proves investor appetite for ESG products and reflects management aptitude for innovation, communication and investor relations (ESG Investor Day).

Timing

Schneider Electric chose the right time to turn to the convertible bond market (at its highest since 2007). The timing of the issuance reflects the agility of the company’s leadership team and its ability to take advantage of (i) favourable financing conditions, (ii) a record share price (iii) and investor interest in ESG issues.

Strategy

The offering reflects the long-term strategy of Schneider Electric with respect to meeting goals in terms of its impact on the climate, environment and social issues. Part of the proceeds from the bond issuance will finance its drive to meet the targets set during ESG Investor Day. The convertible bond issuance will also diversify sources of capital and expand its established investor base.

Terms

Schneider Electric saved an estimated 60bps a year on issuing the convertible bond, with 30bps of implied volatility directly linked to the highly volatile market environment caused by the public health crisis and 30bps linked to the financial and ESG characteristics of the asset, making it particularly attractive to investors.