By: Aryan Mehra (University of Western Ontario), Charlie Solnik (Cal Poly SLO), Chirag Gupta (NYU Stern)
Edited by: Udhaav Jhunjhunwala (SMU)
Overview of the Deal
Visa is the latest company to join the expanding list of firms issuing green bonds. On August 11, Visa announced its total green offering of $500 million. The bond will pay a semi-annual coupon of 0.75% with a maturity date of August 15, 2027 and is in line with Visa’s commitment to drive sustainability. The proceeds will be used to upgrade existing infrastructure projects to green buildings which are generally certified by organizations such as LEED (Leadership in Energy and Environmental Design). The funds will also be used for improved energy and water efficiency projects. This bond offering comes at a time when investors are seeking low risk investments over more risky ones such as those in industries like Oil and Gas, allowing Visa to take on a corporate socially responsible initiative at a low cost.
Current macroeconomic conditions have led investors to leave positions in riskier companies and trend towards more mature companies with stable cash flows and strong market positions. Investors are grounding themselves in more stable fixed income instruments such as treasury bills as result. This has led to very low yields on bonds, in turn causing higher equity premiums. However, as investors are prioritizing liquidity over returns, Visa can find value in funding environmentally responsible initiatives at a low price. With many industries such as retail, oil, and gas having taken hard hits, risk levels on commercial paper from companies in these areas have increased pushing investors towards safer industries and companies with good credit ratings such as Visa. Consequently, blue chip companies like Google, Amazon, J&J as well as Visa source funding at low coupon rates.
Additionally, the rise of impact investing serves as an additional catalyst for the firm’s bond issuance. Private equity firms are starting to emphasize investments in companies that contribute towards environmental sustainability. Thus in attempts to attract investors, companies are increasing sustainability attempts. Reflecting these trends, Visa has also appointed a Chief Sustainability Officer. In fact, over 350 green bonds have been issued since the start of 2020. The total amount raised via these green issuances has seen a 31% increase from last year, indicating increasing investor demand for such issues. As well, climate change issues such as the California Wildfires have been a hot topic in the last few months, putting further social pressures on businesses to increase sustainability practices.
Online shopping has only increased in popularity since the start of the global pandemic earlier in the year. Consumer behaviour has drastically changed and many people are reliant on cashless payment options more than ever. Transaction volume will continue to increase and stay high, serving Visa well. Additionally, many companies stopped taking cash for public health reasons, such as food delivery companies that are now offering contactless delivery options (provided that the customer has paid online beforehand). Companies within the payment industry, such as Visa, have greatly benefited from this as the reliance and demand for their services have increased.
Visa Inc. is an American multinational financial services corporation headquartered in Foster City, California, United States. It facilitates electronic funds transfers throughout the world, most commonly through Visa-branded credit cards, debit cards and prepaid cards.
Founded in: 1958
Headquartered in: Foster City, CA
CEO: Alfred F. Kelly Jr.
Number of Employees: 19,500
Market Cap: USD 453.67 billion (as of 15 October 2020)
EV: USD 463.21 billion (as of 15 October 2020)
LTM Revenue: USD 22.88 billion
LTM EBITDA: USD 15.48 billion
LTM EV/Revenue: 19.1x
LTM EV/EBITDA: 28.0x
Figure 1: Current Capital Structure
Figure 2: Bond Structure
Figure 3: Credit Ratings of Visa
S&P has given Visa’s latest issuance a rating of AA- as of 10 August , indicating their current strong financial position. Moody’s has also given the company a rating of Aa3 as of 15 July. These ratings are justified by Visa’s low default risk. Additionally the company has an EBITDA/Interest Expense multiple of 31.7x reflecting that they will be able to easily make interest payments as they are due.
The reason for these high ratings is primarily due to Visa's low use of leverage in its capital structure and the company’s vital position in the global electronic payments ecosystem. This sentiment is paired with the company’s high short term liquidity shown by its current and quick ratios. Visa is a market leader in a stable industry and as shown by the high credit rating, this bond ensures investors that they can be confident in receiving their investment back.
Projections and Assumptions
Why was this deal done?
Visa is committed to protecting and advancing environmental sustainability. In a released Green Bond Framework, the firm stated that the majority of funds will be used to improve infrastructure and support projects fulfilling the United Nations Sustainable Development Goals. Sustainalytics also conducted a green audit on Visa’s planned use of the funds and concluded the company’s plan was credible and aligned with the four core components of the Green Bond Principles outlined by the International Capital Market Association (Use of Proceeds, Project Evaluation/Selection, Management of Proceeds, and Reporting). Furthermore, Visa will be publishing a public green bond report which will contain the details on fund allocations, as well as the balance of unused funds which will be held in cash or liquid securities. Reflecting Visa’s vision they have also appointed a Chief Sustainability officer to further push for environmental sustainability within the company.
This issuance comes at the heels of Google’s recent sustainable bond issuance, which is pressurising industry leaders to join this sustainability trend and issue green bonds. Overall, this high reward, low risk offering for Visa will be able to not only garner substantial goodwill, but it will also allow Visa to take advantage of cheap financing that will be used to improve the company’s infrastructure.
At the start of the COVID-19 pandemic, Visa was hit particularly hard by a decline in transaction volume with credit transactions declining by slightly over 30%. Travel spending, which comprises a material portion of their overall revenue, saw a decline of $17.7B back in March. However, since the initial decline of overall spending, transaction volume is now steadily recovering at about 5% a month. In fact, Visa’s Q4 earnings are expected to demonstrate a material trend towards recovery.
The recovery in transaction volume is largely a result of a migration of purchases from in-person to online. This migration works in Visa’s favor, as they charge higher fees when cards are used remotely. These remote transactions allow them to earn more revenue with less transactions, placing Visa in a relatively safe short-term position. Furthermore, as consumer confidence increases and individuals begin to travel again, Visa could end up fully recovering within the next few quarters.
In the short-term, Visa aims to allocate the funds from the bond issuance as soon as possible to the refinancing of on-going and financing of new, sustainable projects. As outlined in the company’s Green Bond Framework, these projects will fall in at least one of several categories: Green Buildings Energy Efficiency, Renewable Energy, Sustainable Water and Wastewater Management, Clean and Mass Transportation, and Inspiring and Empowering Sustainable Living Behaviors. As of the writing of this report, Visa has yet to announce any initial projects that will use these funds.
Visa has not outlined any specifics of where the proceeds will be used; however, they have stated that full transparency will be given when the funds are used. The company ensures that they will publish these results in a report. While the bond has a low yield, its return should indicate a return similar to a traditional bond offering. Visa may be able to increase its operating performance through the realization of cost synergies when switching over to clean energy. Investments in green energy tend to be long term so these benefits will not be realized in the first few years of the issuance. However, investors planning on holding these bonds until or close to the bond’s maturity may be able to get a great return if Visa can use the funds effectively and demand for the bonds goes up.
If Visa can reduce its infrastructure costs by shifting to clean energy in its facilities, it will have shown that environmental initiatives not only help reduce carbon emissions but also help financially. Other companies may then follow suit. A challenge about the allocation of these proceeds is that they are restricted for certain uses and if Visa is not careful in how it allocates them, they could face backlash from investors. This uncertainty may be a reason why they have not declared any projects using the proceeds from the bonds.
Online shopping has only increased in popularity since the start of the global pandemic earlier in the year. Consumer behaviour has drastically changed and many people are reliant on cashless payment options more than ever. Transaction volume will continue to increase and stay high, serving Visa well. Additionally, many companies stopped taking cash for public health reasons, such as food delivery companies which now offer contractless delivery given a customer has paid online beforehand. Visa benefits from this as the demand for their services increases.
Consumers are increasingly using digital payment options and looking for major corporations to emphasize environmental issues. Visa addresses all of these trends with their low-cost green bond issuance, thus setting the firm up in the long run while building solid goodwill with consumers. The company is also continuing to expand partnerships (most recently with Paypal), and is building a more secure way to purchase goods and services. In a time of uncertainty, Visa’s debt issuances are one of the safer and more reliable options for investors who are looking for value-driven securities.
Financial Ratio Analysis
Figure 3: Ratios
Visa has been steadily profitable through the last few years as shown by its increasing Return on Equity and Return on Capital figures. This increase is good for both equity and debt holders as it increases investor confidence that Visa is using funds effectively
The company has a healthy current and quick ratio which is notable as the current economic environment has led to many debt obligations not being paid. However, Visa, in the short term, should be able to easily satisfy any obligations should they arise
Visa’s Total Debt/Capital ratio has remained relatively stable between 30-40%. In conjunction with their low Net Debt/(EBITDA-Capex), this indicates there is room for Visa to take on additional leverage
Additionally, the high EBITDA/Interest Exp ratio indicates that they have healthy cash flows to meet their interest obligations
Risks and Uncertainties
A key risk to consider with green bond issuances is the potential of greenwashing. Visa could allocate funds to projects that are not environmentally friendly but claim they are. This misallocation of funds however would be detrimental to the company’s reputation and brand image making it an unlikely scenario. Additionally, certifications such as Energy Star and LEED will help ensure that the building upgrades are environmentally friendly. The green bond allocation report will also be a good way for investors to keep track of what Visa is doing with the proceeds. This transparency opens the opportunity for whistleblowing in the event Visa decides to misallocate the funds.
One issue for investors is that the green bond market is not as liquid as non-green bonds. Demand could swing either way depending on the result of the U.S election as both parties have very different policy strategies revolving around clean energy. An unfavourable outcome for the clean energy industry would lead to depressed bond prices. Another risk for investors is always the chance that they do not get paid due to adverse conditions affecting the company however Visa’s current liquidity position does not warrant much concern.