Cie Financière Richemont, the Swiss luxury giant, is roadshowing its inaugural bond deal this week. It is wisely choosing euros to help it secure funding at bargain-basement prices.
It might appear that a first-time issuer who is saying very little about the use of proceeds would have to pay some premium to issue debt. Not so for Richemont. Even the risk that the company gets hooked on cheap money to pay for acquisitions looks bearable.
The company hasn’t said how much it will issue, but it will probably be big. A proposed eight-year tranche is likely to yield about 1.1 to 1.2%, a 12-year a little above 1.5% and a 20-year bond above 2%. That’s by looking at comparable deals and estimating the credit spread over the mid-swap curve; this could well wind up being a bit on the generous side.
One of the yield-suppressing forces at work is the European Central Bank, both its negative deposit rate and its willingness to mop up the free float in the corporate bond market.
Richemont’s single A+ grade at S&P Global Ratings makes it a natural candidate for the central bank’s 143 billion euro ($176 billion) portfolio. Its similarly rated rival in the luxury sector LVMH has already blazed that trail. The ECB holds nine of LVMH’s debt issues, effectively underpinning free funding for the fashion group. This enabled it to bring a 1.25 billion-euro three-year bond in May with a zero percent coupon. While Richemont’s longer maturities mean that it shouldn’t get quite that rate, were it to issue three-year debt, it probably would.
While this is all very noteworthy, it’s still fair enough to ask what it wants the money for. Because by all accounts, it doesn’t need it. Richemont is in the process of buying the half of Yoox Net-a-Porter Group it doesn’t own for about 2.7 billion euros. It will also need to keep investing in the online luxury retailer, as digital competition steps up. Richemont has plenty of cash for this. But if it can borrow long-dated money at minimal cost, that opens up its options to potentially include a war chest for future acquisitions.
As Gadfly has noted, the luxury market has been turbo-charged by a revival in Chinese demand and confidence among US consumers, and this has elevated valuations. That might not last forever. Were there to be an industry downturn, there might be opportunities for the bigger groups — not just Kering and LVMH, but also Richemont — to add to their portfolios on the cheap.
Analysts at Exane BNP Paribas have even suggested the possibility of a combination between Kering and Richemont. That would blend the French group’s strength in fashion and leather goods, with the Swiss company’s prowess in watches and jewellery, and challenge the might of LVMH.
Even if Richemont wanted to stay closer to home, there are spending possibilities. Last year the company took a 5% stake Dufry, an operator of duty free shops, and there might be an opportunity to increase that holding.
The prospect that the borrower will turn around and start picking up purchases shouldn’t bother bond holders. They’ll still treat it like royalty — the reputation of founder and chairman Johann Rupert, who had the business acumen to build the company up from very little, assures that. He’s very nearly the Warren Buffett of luxury watches — he takes a long-term view and isn’t interested in the cheap plays. Of course people will want to lend to him.
But once it has tasted the fruit of easy money, Richemont might find it becomes a more frequent borrower. Given that it’s going to the trouble now to build a yield curve, it’s clearly paving the way for another reappearance in the credit market. The prospect that its acquisition appetite increases makes this all the more likely.
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