French bank Société Générale was well placed to support renewable energy company Neoen in issuing its first convertible bond. 

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With environmental, social and governance (ESG) assets growing ever more popular, Europe’s first green convertible bond was positively devoured by investors. The issuer was French renewable energy generator Neoen, with Société Générale as a global coordinator and green structuring bank.

Over the past decade, Société Générale has had a leading position in French equity capital markets (ECM) including, notably, equity-linked products. In 2014, for example, the bank was joint bookrunner on the first non-dilutive convertible bond, a €500m ($589m) transaction for Fresenius, a French healthcare company.

In the same year, it was global coordinator and sole bookrunner for the first senior hybrid convertible bond. This €160m issue of unsecured bonds for Assystem, a French engineering company, secured 100% equity treatment under International Financial Reporting Standards.

Repeat business

As evidence of its proficiency, the ECM team points to the amount of repeat business it generates with corporates. “When we work with a client, they generally come back for more,” says Luis Vaz Pinto (above left), Société Générale global head of ECM. This is thanks to strengths in distribution, structuring and integrated teamwork, he adds.

Neoen has certainly come back for more. The company, founded in 2008, builds and operates solar, wind and biomass power plants in France and around the world. In its 2018 initial public offering (IPO), which raised €697m for a free float of nearly 30%, Société Générale featured as a joint bookrunner. A year later, when Neoen issued €200m-worth of convertible bonds, Société Générale was elevated to the role of global co-ordinator, alongside Natixis. It reprised that role in this year’s green convertible bond deal, this time with Goldman Sachs.

As Mr Vaz Pinto points out, Europe, the Middle East and Africa equity issues overall are up by about a third this year. While IPOs have been down by more than 40%, follow-ons and convertible bond issues have each risen by 50% or more. “There has been a lot of investor demand for convertibles, which show great downside protection for investors and an upside for issuers with the conversion premium,” he says.

Christelle Geret (above centre), a Société Générale managing director, equity-linked, notes that the convertibles market reopened very quickly after the Covid-19 crash. “It’s very convenient for companies, because it allows them to be very quick to market, and to derisk the transaction ahead of placement with a completely confidential sounding process,” she says.

Over the wall

Convertible deals are generally sounded out in the market before launch with the help of a ‘wall-crossing’ process. A limited number of key investors agree to become insiders (and suspend trading in the relevant stock) before giving their opinion on the proposed deal. They indicate the size and terms of the order they intend to place, providing an early start to building deal momentum. “It’s market practice to stick to your indications,” says Emilie Jadat O’Shea, head of equity syndicate at Société Générale.

She adds that wall-crossing is very important in the current volatile market conditions. “Investors like to see that a transaction has been wall-crossed,” she says. “It gives them increased confidence that the terms of the deal have been tested and work for key opinion-leaders.”

Currently, many issuers of convertibles tend to fall into one of two camps, according to Ms Geret. One is those who have been hit by the Covid crisis. The other is those, like Neoen, that need cash to fund their growth but are not yet mature enough to go to the fixed-income market.

“Their credit quality is not investment-grade yet, but investors are compensated with the possibility of being exposed to upside on the equity,” she says.

ESG products popular

In parallel with current demand for convertibles is the growing taste for ESG products. In June, Société Générale's syndicate canvassed equity investor opinion in London, Paris and New York on life in a post Covid-19 world. Nearly three-quarters of respondents believed the crisis would accelerate the rollout of ESG as an investment criterion.

“There’s barely a day when you don’t see a headline about another new ESG strategy,” observes Pierre Troussel (above right), Société Générale’s co-head of ECM for France, Belgium and Luxembourg. Neoen, he says, was a natural candidate for a new green-label product.

Société Générale saw itself as a natural candidate to suggest one. It has long been a leader in innovation, Mr Troussel says. “We have a unique track record in bringing new products to market, especially in the equity-linked space.” The bank has also devoted time and energy to polishing its green credentials. In July it became the first institution, it says, to ‘embed’ ESG factors into its cross-asset research, taking account of how ESG signals and criteria affect valuations.

The world’s first green convertible bond was a 10bn yen ($94m) issue from Sumitomo Forestry in September 2018, but there had never been one in Europe. The team took the idea to Neoen and in January 2020 began discussions over a possible transaction. “We felt Neoen was probably the best issuer to open the ESG convertible bond market, because it is 100% green,” Ms Geret says.

Neoen really liked the idea. “It was the perfect issuer,” reports Thierry Favre, a director in Société Générale's structuring and execution group. “It had just issued a convertible bond, so it knew the product. It is a young and responsive company and was able to prepare quickly.”

Mr Troussel points out that, for most issuers, implementing green documentation takes time. But since the idea of being the first issuer of this kind of product appealed to Neoen, they were correspondingly enthusiastic and efficient in making arrangements. “Preparation took just four weeks, including interaction on a second party opinion (SPO),” he says. “With a less prepared party it would have taken at least double that time.”

Green credentials

The SPO was drawn up by Vigeo Eiris to assess the greenness of the issuer’s bond framework and its eligible projects and assets. Neoen undertook to spend the proceeds only on renewable energy production or storage facilities. Neoen’s recent stock market performance provided a highly supportive context for a deal. Having more than doubled since 2018, its share price had held up strongly during the crisis and was up by 10% for the year to date. The deal was launched at the end of May, during the Covid lockdown, after a two-day wall-crossing exercise.

The order book was covered in less than an hour, according to Ms Jadat O’Shea, with momentum increased by the deal’s green label. “There is a scarcity of ESG product and investors felt compelled to put in large orders,” she says.

By the end of bookbuilding, the book was “many times” oversubscribed, allowing managers to price the instrument on the best possible terms for Neoen. The coupon on the €170m transaction was tightened from an indicative 2.5% to 2%, and the conversion premium boosted from 35% to 40%. That represented a new issue discount of zero compared with the existing convertible, according to Mr Vaz Pinto. The 2019 convertible had priced at the generous end of its 1.25%-1.875% coupon range and the lower extreme of its 35%-42.5% marketing parameters.

“Neoen’s first pre-Covid convertible deal, in October 2019, was not fully optimised,” Mrs Jadat O’Shea says. “This one was.” The team says it was the green feature that made the difference.

Demand was tilted towards long-only investors, who received 61% of the allocation, with 39% going to hedge funds. French and UK investors accounted for a high proportion of the bonds, taking 43% and 48% respectively. In the 2019 vanilla issue, the France versus UK take-up was 66% and 23% respectively.

Alongside the convertible bond issue was a €20m delta placing of shares, executed via an accelerated book build, for those investors who wanted to hedge their exposure. The shares were placed at a 2.9% discount to the previous closing price. Since then, Neoen’s underlying share price has continued to improve, as has the price of the convertible bond. “The issuer is very happy,” Mr Troussel says. “It was the green name and the green product that allowed us to create momentum and value.”

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