Toyota Motor Corp. has made a significant move by issuing socially conscious debt in dollars for the first time in two years.

The Japanese automaker aims to enhance its production of electric vehicles as it competes against industry giant Tesla Inc.

To achieve this, Toyota priced $1.5 billion of sustainability bonds in three tranches, according to a source familiar with the matter.

The longest portion of the offering, a 10-year security, carries a yield of 1.08 percentage points above Treasuries after initial discussions suggested a spread of around 1.35 percentage points.

The source, who preferred to remain anonymous due to the confidential nature of the details, mentioned that book orders had surpassed $6 billion as of 11 a.m. New York time. This marks the company's first foray into the US investment-grade market with a bond tied to environmental, social, and governance (ESG) issues since 2021, based on Bloomberg data.

As of now, Toyota has not provided an immediate response to a request for comment. Industry experts anticipate an increase in ESG-labeled debt from the automotive sector, with the majority of capital spending directed towards the transition to hybrid and electric vehicles.

Joel Levington, a credit analyst at Bloomberg Intelligence, expects Toyota's operating margins to improve, while its competitors may face mounting pressure from the launch of new electric vehicles, intensified competition from Chinese manufacturers, and pricing strategies from Tesla. Levington added that Toyota's cautious approach in the electric vehicle market has been advantageous for bondholders, as the company has not aggressively depleted its cash reserves to outperform its peers.

Toyota is one of three issuers entering the US investment-grade primary market on Thursday. Deutsche Bank AG also raised $1.25 billion through a fixed-to-floating rate note issued by its New York arm, following in the footsteps of several other Yankee banks that tapped into the market earlier in the week. Syndicate desks anticipate a relatively slow week in the primary market, with an expected pricing of $5 billion to $10 billion in new debt.

The proceeds from Toyota's recently issued debt, known as "woven planet bonds," will support various projects ranging from the development and manufacturing of battery electric vehicles (BEVs) to environmentally friendly initiatives such as solar and wind power, as outlined in an SEC filing.

In early April, Toyota's Chief Executive Officer, Koji Sato, unveiled the initial stages of a long-awaited plan to electrify the company's vehicle lineup. The plan includes selling 1.5 million battery electric vehicles annually and introducing 10 new EV models by 2026. However, Toyota still has ground to cover in terms of producing electric vehicles on the same scale and pace as Tesla and its Chinese rivals.

This debt deal on Thursday will serve as a litmus test for investor interest in the US, where sales of sustainable bonds have recently declined. The decrease can be attributed to a political backlash against ESG investing by influential figures in the Republican party and increased scrutiny from money managers concerned about potential greenwashing by companies, where the true benefits of the bonds may be overstated.

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Source: Bloomberg