Hennes & Mauritz AB has slashed the yield offered on its debut bond by half after investor demand for the Swedish retailer’s sustainable debt proved so strong.

“This blowout deal truly opens the door for issuers to come to the market and meet the sustainability-focused investor community,” said Lars Mac Key, head of sustainable bonds at Danske Bank, one of the banks that helped market the 500 million euro ($604 million) offering.

The investment-grade notes garnered orders of about 3.8 billion euros, which covered the deal more than seven times and allowed H&M to cut the spread by as much as 50 basis points between initial price talk and final terms. So far this year, corporate bonds have tightened on average by 32 basis points, according to data compiled by Bloomberg.

Key to its success was a sustainability-linked format whereby the interest on the notes steps up if key performance indicators — such as emissions or recycled materials targets — aren’t met. Unlike green bonds, these bonds aren’t tied to the financing of a specific project.

Helena Lindahl, a portfolio manager at Storebrand Asset Management who bought the new H&M bonds, says these type of bonds are “flavour of the day” and “invites corporates that haven’t got a large pool of green assets.”

Danske’s Mac Key agrees and says “most of our meetings these days are either about or include the SLB format.” He now expects issuers from other industries to follow suit on the back of the H&M transaction.

“Apparel and retail is definitely a sector, but also shipping, aviation and production companies as cement producers, pulp and paper and the food industry,” he said.

Lindahl describes the targets set by H&M “as a game changer” and denies that they lack ambition — an accusation that has emerged elsewhere within this nascent asset class.

“If more retailers followed this route there will be a completely new industry for recycling clothes on a scale that is pretty far from where we are now,” she said.

By Leo Laikola