issuer Schleiniger

The McDonald’s franchisee married financial success with material environmental outcomes with its first SLB. Shanny Basar reports.

It is appropriate that Arcos Dorados, the franchise that operates the McDonald’s brand in 20 markets in Latin America and the Caribbean, has called its social and environmental strategy ‘Recipe for the Future’. The programme’s goals are aligned with the UN’s Sustainable Development Goals and include making a positive impact on youth opportunity, sustainable sourcing, packaging and recycling, climate change and family wellbeing. To help achieve these targets, Arcos Dorados sold a sustainability-linked bond (SLB) in April this year and says it became the first company in the restaurant industry to sell a financial instrument with environmental objectives.

Arcos Dorados had previously committed to reducing emissions from its restaurants and offices by 36%, and from its supply chain by 31%, by 2030. It hired a third party, climate consultancy South Pole, to assess its 2021 greenhouse emissions as a baseline for measuring progress. Last year, the company also tied a portion of executives’ variable compensation to environmental, social and governance (ESG) indicators under the Recipe for the Future framework.

Walking the walk

Daniel Schleiniger, Arcos Dorados’ vice-president of investor relations (pictured), says the company was the first in the restaurant industry to produce an audited ESG report, which covered 2020, despite the pandemic. “It raises the bar for the quality of ESG information and demonstrates our commitment to the platform,” he says.

Mr Schleiniger adds that when the treasury and finance team evaluated alternatives for liability management, they asked about the possibility of further aligning the company’s ESG strategy with its financial objectives. “The SLB was a marriage of two needs,” he says. “You might say we put our money where our mouth is.”

Arcos Dorados chief financial officer Mariano Tannenbaum says that issuing any bond is a very complex process. In addition to the standard analysis, the company had to identify the correct key performance indicators (KPIs) for reducing emissions and the sustainability performance targets (SPTs) for each KPI. “Given our existing long-term ESG commitments it was very important they are measurable and material to the business, so we selected two greenhouse gas emissions KPIs,” says Mr Tannenbaum.

You might say we put our money where our mouth is

Daniel Schleiniger

The two SPTs are to reduce Scopes 1 and 2 absolute greenhouse gas emissions by 15% by 2025, and to cut Scope 3 emission intensity by 10% by 2025. Both targets are based on the 2021 baseline. If the company fails to achieve either SPT, the interest rate used to calculate the coupon payment will increase by 12.5 basis points (bps) for the remainder of the term, and by 25bps if the company fails to achieve both. ESG ratings firm Sustainalytics says that it considered the KPIs to measure a “material issue” and that the SPTs were aligned with Arcos Dorados’ sustainability strategy.

On April 21, Arcos Dorados announced the pricing of the $350m sustainability-linked senior notes with a coupon of 6.125%, which matures in 2029 via Citi, Itaú, JPMorgan and Santander. The four banks were selected on the basis of their relationship with Arcos Dorados and their reach with long-term investors in the US and Europe, but also on their credentials on previous sustainability-linked transactions in the region. JPMorgan and Itaú specifically advised on the sustainability-linked aspects of the bond.

In demand

Arcos Dorados met approximately 80 funds during a three-day roadshow which included many existing investors, but also a number of new ESG-focused fixed-income investors, most based in Europe. “In some cases during the roadshow, at least 50% of the questions in meetings were related to the ESG platform, which was really encouraging,” says Mr Tannenbaum.

The transaction was five times oversubscribed, generating demand worth $1.8bn, despite difficult market conditions during the first half of this year. The SLB was issued at a much cheaper rate than similar companies with similar ratings, and at the lowest spread over US treasuries in the company’s history, according to Mr Tannenbaum. “It’s difficult to say that is entirely because of ESG but the SLB helped to achieve these results, so we were extremely satisfied with the result,” he says.

The bond extended the average life of the company’s debt from 3.9 to six years and eliminated refinancing risk, as inflation and interest rates rise. “Access to capital markets is very restricted for many companies, so this transaction was definitely a success,” says Mr Tannenbaum.

Mr Schleiniger adds: “We lead the restaurant industry in Latin America in many ways, including on the ESG front, and we are in a position to promote systemic change. We hope other players in the industry will make the investments necessary to follow our lead by taking ESG from talking points to measurable actions.”

He argues that Arcos Dorados’ scale means it can make an impact beyond the restaurant industry because in order to achieve the goals in Recipe for the Future, companies in the supply chain will also need to reduce their greenhouse gas emissions, which creates demand for renewable energy. In 2021, around 12% of Arcos Dorados’ energy use came from renewable sources, up from just 4% in the previous year. As a result, Arcos Dorados and power company EDP opened three solar plants in Brazil in July this year.


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