By William Hoffman
NEW YORK , May 12 (IFR) - Wells Fargo is out with its inaugural sustainability bond Wednesday shopping its first senior unsecured offering in nearly a year.
The US$1bn four-year non-call three fixed-to-float bond set initial price thoughts at Treasuries plus 70bp-75bp and will be used to fund eligible projects under its sustainability bond framework first published in March.
Wells Fargo raised US$26.5bn in the US high-grade primary last year, all of it in the first five months of 2020 and since then has only priced a US$3.51bn preferred note back in January.That scarcity of Wells Fargo paper is spurring increased investor demand for today's issue at a time when demand is already sky high for new paper.
With ICE BofA average IG credit spreads remaining remarkably steady at an average of 93bp-94bp over the last 11 trading sessions, liquidity in the secondary market is drying up and the buyside has little choice but to buy new issuance.
"There is currently a gross imbalance between sellers and buyers of debt," said David Knutson, head of credit research at Schroders. "Adding a sustainability feature only increases the chronic demand of credit investors."
The sustainability bond will fund both green and social projects, Wells Fargo detailed on a call Wednesday morning. Specifically, 50% of the funds will go toward renewable energy projects with 85% of those funds going toward investments in wind power generation such as a tax equity investment in the Cimarron Bend wind farm in Clark County Kansas, which is Enel's largest wind farm in North America.
The remaining funds are set to be split evenly between affordable housing and socioeconomic advancement. For example, Wells Fargo is lending to a project in the Bronx, New York to build a unit with 540 affordable housing units. And using New Markets Tax Credits the bank is investing in a children's institute, which will provide resources to children facing adversity and poverty in the Watts neighborhood of Los Angeles.
Those ESG elements and the limited size of the new issuance could push spreads tight to its outstanding curve, research firm CreditSights noted.
Wells Fargo's outstanding 2.406% 2025s that are callable in October 2024 were last trading at 65bp over Treasuries, according to MarketAxess data. But spreads on the new deal have room to move some 20bp-25bp tighter from IPTs closer to where the outstanding note was trading on a G spread basis at around 48bp over, according to CreditSights.
"To the degree ESG bonds now carry a modest premium, combined with the will-not-grow issuance and light supply over the last twelve months, we expect Wells' offering to be well-bid and collapse any concessions," CreditSights noted.
Knutson added, "Fairness’s lower bound is being tested."
(Reporting by William Hoffman; Editing by Jack Doran)
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