Wesfarmers in sustainability-bond first

Published June 21 2021

Australian conglomerate Wesfarmers has issued the first sustainability-linked bond (SLB) into the $A medium-term note (MTN) market, a milestone transaction which paves the way for other issuers to tap this emerging format in the local bond market.

While green bonds are the most-popular structure in the sustainable capital markets, they are not suitable for every issuer due to its use-of-proceeds structure. Sustainability-linked bonds offer an alternative financing solution for companies to show their accountability and commitment to sustainability.

A sustainability-linked bond commits an issuer to key environmental, social and/or governance targets. Precedents in the bond market are for coupon step-ups or a premium-payment mechanism if the targets are not met. Transactions are issued in accordance with the International Capital Markets Association’s (ICMA) sustainability-linked bond principles and have assurance from a third party.

“The sustainability-linked bond format continues to gain momentum and strong investor interest as it gives investors an opportunity to support a company in achieving future core sustainability targets,” Tessa Dann, Director, Sustainable Finance, ANZ said.

“This transaction from Wesfarmers follows international market best practice and it will launch a new chapter in the Australian capital market for this format of issuance.”

As part of the transaction, Wesfarmers has committed to obtain all of the energy requirements for its Bunnings, Kmart Group and Officeworks retail businesses from renewable sources by the end of 2025. The company has also committed to limit the average emissions intensity of its ammonium nitrate production plant to 0.25 tonne of carbon dioxide equivalent (CO2e) per tonne.

The coupon will step up by a maximum 25 basis points at the trigger date if the commitments are not met.

In accordance with Wesfarmers’ Sustainable Finance Framework, the bond is issued under the company’s $A4 billion Note Programme and is aligned with ICMA’s sustainable finance principles and guidelines. ANZ acted as Joint Sustainability Coordinator and Joint Lead Manager.

The SLB format is slowly gaining traction with Australian companies. Engineering contractor Worley tapped the Eurobond market with €500 million SLB in early June, the first Australian company to do so in the public capital market. Sydney Airport was the first Australian issuer ever with a $A100 million SLB in the US Private Placement market in February 2020.

Compelling investment

Rated A3 (Moody’s) and A- (Standard & Poor’s), Wefarmers’ $A1 billion bond was split into a seven-year $A650 million tranche and a 10-year $A350 million tranche, paying a coupon of 1.941 percent and 2.55 percent respectively.

Investor demand was strong with the order book heavily oversubscribed by around 2.5 times driven by demand from Australian, New Zealand and Asian asset managers such as mutual funds, insurance firms and pension funds.

Proceeds from the bond will be for general corporate purposes including the refinancing of upcoming maturing bonds.

ANZ’s Andrew Brown, Director - Sustainable Finance, Capital Markets said Wesfarmers’ bond had a “compelling investment story due to the strength of the company’s credit, rarity value as well as the linkage of funding to its sustainability strategy”.

“Investors commended Wesfarmers’ on the leadership and transparency required in committing to such targets,” he said.

Listed on the Australian Securities Exchange with market capitalisation of $A63 billion, Wesfarmers is a diversified conglomerate with businesses across retail, chemicals, energy and fertilisers.

Sharon Klyne is Associate Director – Communications, ANZ Institutional