Luxury bonds

The golden age of bonds has begun, and even luxury markets have succumbed to the allure of high-yield bonds. Over the past year alone, major players in the fashion and luxury industry have issued bonds, primarily targeting institutional investors and retail markets. However, luxury brands, unlike banks, do not have a tradition of issuing bonds on a regular basis, resulting in bonds with distinct characteristics. What drives these fashion and luxury companies to turn to such financial instruments for capital raising? Marina Catino, a partner at Kearney Italia, explains to MFF that the primary reason is the need for liquidity to fund mergers and acquisitions (M&A).

Consider the example of Lvmh, which in 2017 issued a 4.5-billion-euro bond to finance the acquisition of Dior. Later, in 2020, they issued a new 1.5-billion-euro bond in Luxembourg, with a maturity date set for 2031, to support the significant acquisition of Tiffany & Co. of the previous year. Additionally, one year ago, Bernard Arnault’s Conglomerate issued 1 billion euros worth of bonds maturing in 2025. Furthermore, in September, two tranches were issued, one totaling 1 billion euros maturing in 2029 and another worth 1.5 billion euros maturing in 2033. «Even Kering’s recent acquisition of Creed was financed through a 3.8-billion-euro bond issuance across four tranches at the end of last summer», the analyst explains.

According to rumors, Kering, the Conglomerate led by François-Henri Pinault, shelled out 3.5 billion euros to acquire the historic niche perfumery Maison to integrate into its new Kering Beauté division. The bond comprises four tranches: the first 750 million euros, maturing in two years with a 3.75% coupon rate; the second 750 million euros, maturing in four years with a 3.625% coupon rate; the third 1 billion euros, maturing in eight years with a 3.625% coupon rate; and finally, a tranche of 1.3 billion euros, maturing in 12 years with a 3.875% coupon rate. In November, Kering issued its first sterling-denominated bond, totaling 800 million pounds (equivalent to 936.5 million euros at yesterday’s exchange rate), consisting of two tranches of 400 million pounds each, with maturities of three years and nine years and coupon rates of 5.125% and 5%, respectively. These bonds currently yield 4.9% and 4.8% at maturity, as illustrated in the table on this page. The Group stated that the issuance aimed to «enhance financial flexibility and diversify its sources of funding». Last week, a new dual-tranche bond issuance totaling 1.75 billion euros, comprising 1 billion euros with an eight-year maturity and a 3.375% coupon and 750 million euros with a twelve-year maturity and a 3.625% coupon, furthered this objective.

Among French giants, L’Oréal issued bonds amounting to 2 billion euros on the Euronext Paris last May as part of a broader 5-billion-euro EMTN program. Split into two segments, one consisting of 1 billion euros in fixed-rate bonds maturing in two years with an annual coupon of 3.125% and the other 1 billion euros maturing over five years with an annual yield of 2.875%, the offering garnered a total demand of 4.5 billion euros—equivalent to slightly over 2.2 times the total volume. «The net proceeds from the bonds will serve various corporate purposes, including financing the acquisition of Aesop», the beauty giant explained. Similarly, across the Atlantic, prestigious cosmetic companies have also succumbed to the allure of bonds.

In the spring of 2023, Estée Lauder placed 2 billion dollars (1.82 billion euros) in three tranches on the New York Stock Exchange (NYSE). The tranches, valued at 700 million dollars each and 600 million dollars respectively, will mature in 2028, 2033, and 2053. According to the US Group, the proceeds will be used for «general corporate purposes, encompassing operational expenses, working capital, and capital expenditure, as well as the repayment of short-term or long-term loans». This move comes amidst financial challenges following the acquisition of Tom Ford International in November 2022 for an estimated 2.8 billion dollars (2.56 billion euros). Additionally, at the end of last year, Tapestry Group, the parent company of Coach, Kate Spade, and Stuart Weitzman, issued a series of bonds to finance the acquisition of Capri Holdings, as announced in August, and to «cover associated fees and expenses». The Company clarified that, pending the completion of the acquisition of the parent company of Versace, Michael Kors, and Jimmy Choo, «the net proceeds from this offering may be temporarily invested in liquidity or short-term investments». In general, an alternative to utilizing bonds could involve resorting to bank debt. «Typically, bonds on the market carry a minimum size of 400-500 million euros, whereas bank financing may cater to lower amounts», Catino explains. «Given the substantial sums involved, bond issuance tends to be justified for M&A or extraordinary operations. Generally, large corporations boasting high ratings, such as Lvmh, Hermès, or EssilorLuxottica, prefer market fundraising, which offers longer-term financing compared to bank loans. Conversely, smaller companies with lower credit ratings tend to rely more on bank financing unless their operations are of significant scale or require short-term funding, thereby reducing exposure to bank debt».

An important aspect characterizing recent debt issuances within the luxury sector is the growing adoption of green bonds. These financial instruments, which link bond performance to predetermined sustainability criteria, have been on the rise since 2020. Burberry, for instance, listed its first bond to finance sustainable projects on the Sustainable Bond Market of the London Stock Exchange (LSE). The 300-million-pound bond (equivalent to 351 million euros), maturing over five years, carries a coupon rate of 1.125%. Similarly, in the same year, Chanel, a traditionally discreet Maison hesitant to disclose its financial statements, made its debut in the capital market by raising 600 million euros through a sustainability-linked bond traded on the Luxembourg Stock Exchange. This issuance comprised two tranches of 300 million euros each, with maturities in 2026 and 2031, tied to progress in meeting goals related to global warming mitigation and commitments under the Science Based Targets initiative. «Finance serves as a tool that can be leveraged to achieve ambitious sustainability goals, especially those involving the entire value chain, known as Scope 3. This includes indirect business activities that are pivotal to the sector’s operations», Guia Ricci, Managing Director and Partner at the Boston Consulting Group (BCG), and Simone Pedrazzini, Director at Quantis, explain to MFF.

«For suppliers, participating in such initiatives opens doors to new resources for innovation and sustainability. Meanwhile, for companies, vertical integration offers direct control over the supply chain, ensuring transparency and traceability in sourcing and processes». Therefore, green bonds offer a dual advantage: they promote positive environmental impact while providing transparency on capital utilization. Furthermore, they offer exposure to the financial sector, presenting appealing risk-return opportunities. «These phenomena can be linked to the growing attention from institutional investors and sustainability measurement frameworks. This means having introduced Environmental, Social, and Governance (ESG) targets into rating systems», the experts conclude. That is why, in recent years, green bonds have continued to gain traction, attracting not only fashion and luxury companies but also sportswear and outerwear brands like Adidas and VF Corporation, which launched a second round of 500 million euros last year. Even the fast-fashion giant H&M joined the fray, issuing a second tranche of financing in 2023 to support projects focused on recycled materials, renewable energy, and sustainable water usage. «For fashion and luxury companies, linking the cost of capital to sustainability targets through sustainability-linked bonds has become crucial, as it contributes to achieving a triple objective», Kearney further emphasizes.

The first goal is to enhance the attractiveness of bond acquisitions for institutional investors, who increasingly have mandates requiring a portion of their portfolios to be allocated to ESG investments. The second objective is to reduce financing costs, as companies opting for green bonds are perceived as more resilient to credit downgrades and defaults, potentially granting them access to capital at lower costs, particularly those with high ESG ratings. Finally, green bonds serve as a means for companies to communicate their commitment to ESG principles, thereby enhancing brand value. «This holds significant importance for the luxury sector today, as consumer purchase decisions increasingly favor brands demonstrating environmental sensitivity across their value chains», Catino underlines. «The issuance of debt by major fashion and luxury companies, especially through green bonds, is garnering significant success in the market. Take, for instance, H&M’s recent issuance, which generated demand 7.6 times higher than the offer».

However, while green bonds often receive subscriptions well above the offer, indicating robust demand, according to Jocelyn Wilkinson, Partner and Associate Director of Fashion and Luxury at BCG, the criteria for allocating capital raised through green bonds are frequently criticized for not delivering substantial environmental impact mitigation. «Furthermore, for fashion and luxury brands, the process of preparation, obtaining independent ratings, and issuing bonds can be quite burdensome because it falls under extraordinary activities and has significant administrative burdens», Wilkinson explains. In conclusion, who typically invests in such bonds? «Institutional investors are particularly motivated to invest in ESG debt securities, as many are required, in portfolio construction, to allocate capital to sustainability-focused investments», Kearney concludes. (All rights reserved)