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Starbucks quenches Japanese thirst for SRI bonds

* Coffee chain brings sustainability bonds to Japan in overseas debut

By Taka Okomoto

TOKYO, March 13 (IFR) - Starbucks answered Japan's growing demand for socially responsible investing (SRI) last week when it chose to launch the country's first sustainability notes in its maiden international bond offering.

The US coffee giant priced 85 billion yen ($736 million) Global 0.372 percent seven-year senior notes at 20bp over yen mid-swaps, again choosing Tokyo for its initial foray outside North America, just as it had done when it opened its first overseas coffee shop in the Ginza district of the Japanese capital in 1996.

Investors were drawn to the high name recognition of the group, which has now 1,245 stores across the country, and the issue size could have been even larger.

"Books built up (to) over 100 billion yen, but the size was capped at 85 billion yen," said one of the leads on the issue.

Marketing started at 20bp–25bp over mid-swaps on March 7, and the range was progressively tightened to 20bp–23bp the following day and, eventually, 20bp on the day before pricing.

Starbucks (A2/A/A) chose to issue Global rather than Samurai bonds as the documentation is much easier for the former. "It would take two months of legal work (for a Samurai) and they would need to provide disclosure in Japanese," said another lead.

However, the bonds were sold exclusively in Japan, split between Tokyo-based institutions, including life insurers, and regional investors. The ratio was about 90-10 in volume terms and 50-50 in account terms.

The spread translated after swaps to a level higher than the issuer's US dollar curve, the leads said, pointing out that Starbucks trades very tight in US dollars. As such, the guidance range was based on the coupons of other high-quality US issuers that had done deals in Japan and on domestic yen transactions.

Sources close to the deal also hinted that Starbucks was likely to keep the proceeds in Japan to meet funding needs there rather than swap them into dollars.

The seven-year tenor was selected based on the issuer's maturity profile and to invite a wider range of investors. ORIGINAL FEATURES The bonds have two new features – a par call and the sustainability angle. A par call is common on US deals, but this was a first for yen deals. However, one of the leads said it was not a big hurdle because some Japanese investors had already bought US bonds with the feature.

Starbucks created documents in both English and Japanese to introduce the sustainability bond framework and lay out details pertaining to the use of proceeds, the process to select projects, the management of proceeds and reporting.

Opinions from Sustainalytics, which helped to formulate the framework in alignment with the Green Bond Principles 2016 and the Social Bond Guidance 2016, were also added in the documents.

Starbucks says the bonds "will focus on enhancing its sustainability programmes around coffee supply chain management". Some of the proceeds, for instance, will be used to purchase coffee from sustainable plantations.

The company issued its first corporate sustainability bonds last May with a domestic $500 million 10-year transaction that was also the first issue of such bonds in the US.

The environmental, social and governance (ESG) focus helped to attract investors to the yen issue, even some who usually seek longer tenors, such as life insurers. "Some of the insurers say 'I would rather have 10 years, but, since it is sustainability bonds, even though it is seven years I can use the segregated money put aside'," said one of the leads.

ESG instruments are becoming popular with Japanese investors. French power utility Electricite de France issued the first Green bonds in the country less than two months ago.

"Foreign issuers are more responsive than Japanese issuers to the demand for those products", said Hiroaki Hayashi, general manager of the investment department at Fukokushinrai Life.

"For Japanese issuers, it is a bit tortuous to issue such bonds. They don't need to issue them at all, because they can borrow money as much as they like, as Japanese investors have lots of funds," Hayashi said. "As interest rates are low here and bonds with that sort of concept can attract demand, foreign issuers are responding more quickly than Japanese issuers to the demand among Japanese investors."

Hayashi also emphasised the advantage of buying ESG products. "I believe, from my experience, it is actually companies that contribute to society that give high returns in the long run," he said.

"It is a good thing that people start to realise that. Demand for such bonds is definitely growing. The fact that Starbucks drew such a large response verifies that."

Morgan Stanley International and MUFG Securities EMEA were underwriters. Mitsubishi UFJ Morgan Stanley and Morgan Stanley MUFG sold the bonds to domestic investors. (Reporting by Takahiro Okamoto; editing by Daniel Stanton and Steve Garton)

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