A high-yield circular economy

Is it possible to promote sustainable development without prioritising longer product lifespans? Mirova thinks not, and this is why it is crucial to support the development of a circular economy.

The circular economy constitutes an economic model that seeks to maximise resource use and reduce waste based on a hierarchical framework. It prioritises ecodesign, first and foremost, and then repair, reuse, repurposing and recycling, and considers waste-to-energy and landfill only as options of last resort.

This model flies in the face of the linear approach to materials management by suggesting that a product be designed for use in loops from the very start, thereby preventing it from ever degrading. This reduces our dependence on virgin resources as well as the amount of pollution caused by waste. In other words, a circular economy is a system in which materials never become waste and where nature is regenerated.This model faces organisational, technological and public health challenges, especially when it comes to collecting used products separately so that they can subsequently be reused in a different format.

The potential is vast, as only 12% of objects used in the EU in 2022 came from the circular economy¹. Companies participating in the circular economy will continue to benefit from extremely positive underlying trends, such as increasingly strict regulations governing access to resources, pollution, greenhouse gas emissions and waste management, as well as greater awareness of climate-related issues among companies and end consumers.

Whether in the packaging, waste management or sharing economy arena, the number of investment opportunities in relation with the circular economy is on the increase in the high-yield bond universe. We firmly believe that such companies have every chance of enjoying a favourable financial trajectory that will, in the medium to long term, result in improved credit ratings and narrower credit spreads.

In most cases, it does not seem necessary to make use of labelled debt as many of these issuers are already pure players.

Novelis, Constellium, Ball and Crown: opting for aluminium

The environmental impact of packaging depends primarily on three criteria:

• the energy intensity of the manufacturing process and the carbon intensity of the energy used,
• the recycling input rate and actual recyclability, and
• the use of pollutants during the cycle, which varies from one region to another. 

Responsible firms are adopting practices that in turn seek to make their suppliers more responsible, for instance by encouraging them to increase the recycling input rate, which is an essential criterion in the scope of aluminium as the production of recycled aluminium uses 95% less energy than ore-based production².

Aluminium is easy to collect and infinitely recyclable – provided that the residue from the saltcake used is itself recycled; this offers lots of advantages and therefore considerable growth potential in comparison with other materials, especially in developing countries where waste collection infrastructure is still not all that efficient.The aluminium recycling rate stands at 81% in Europe and 57% in North America³. Besides being recyclable, aluminium packaging such as cans also offers logistical advantages; for example, it is easier for clients to refill and transport aluminium packaging than glass packaging. This means that aluminium could gain a larger share of the packaging market in the long term, particularly at the expense of plastic. It also seems worth pointing out that 80% of the plastic waste currently found in the ocean is leaked from flexible polymers, and plastic packaging is the main source of such polymers⁴. Ball (Ba1/BB+) and Crown (Ba1/BB+) will tap into this trend via sales of their cans; this is a largely consolidated industry, with the top 3 firms commanding a 75% share of the market. As a result, they will order more and more flat laminated aluminium products from companies like Constellium (Ba2/BB-) and Novelis (Ba3/BB-), which lie upstream of the value chain. These firms also benefit from rather acyclical demand as most of their orders come from the food and beverages industry.

Séché Environnement, Derichebourg, Darling Ingredients: from collection to recycling

Hazardous waste is mostly generated by industrial firms, so there is a need to develop closed loops enabling them to recover such resources from their manufacturing processes and avoid the mining of virgin materials, for example. Recycling processes rely on good quality inputs, which means that these companies play a crucial role in the industry’s performance whether by sorting waste or carrying out the recycling themselves. 

Derichebourg operates in the metals industry, a cornerstone of the transition, through its scrap metal collection capacity. The circular economy provides a solution to the growing demand for critical materials, which is set to increase four-fold by 2040, driven by mobility. The industry uses up a great deal of energy and generates a large amount of pollutants. This is because mining operations sometimes take place within protected ecosystems using water-intensive processes, while refining involves processes that use up lots of energy or reducing agents such as mercury, which pollute the air and rivers. Derichebourg (BB+) commands a 30% to 35% share of France’s metals recycling market, one that is being buoyed up by a growing number of regulations.

Its clients tend to be long term and its contracts enable it to pass price fluctuations onto its clients, so the company is able to deliver stable EBITDA margins⁵ and enjoy a high degree of visibility on its cash-flows.

The petrochemicals industry, meanwhile, could become the biggest consumer of oil as of 2030. In light of such a risk, the industry’s decarbonisation will require the use of inputs, such as solvents, that are circular and therefore make the mining process less energy intensive. Health and safety issues in the pharmaceutical industry require solvents to be fully separated, a service provided by firms like Séché Environnement (BB). Moreover, Séché’s prominent position in this market is protected by high barriers to entry and it is thus able to keep its EBITDA margins high and steady. The company also boasts promising growth prospects in emerging countries.

Last of all, agriculture emits two greenhouse gases that are particularly responsible for global warming - methane from livestock farming, and nitrous oxide from fertilisers - and that account for 22% of the world’s greenhouse gas emissions, a sizeable share of which is due to livestock farming⁶. Carcass disposal (the recovery of dead animals and abattoir waste) is a process that can be used to produce proteins as substitutes for soybeans and for fish in aquaculture, thus reducing the risks of deforestation and overfishing. It can also be used to produce organic fertilisers as substitutes for chemical fertilisers, which are responsible for climate change and nitrate pollution. Darling Ingredients (Ba1/BB+) boasts a diversified geographic mix and end client base, moderate leverage, and sound cash-flow generation underpinned by growing dividend flows from its renewable diesel joint venture; it is reaping the benefits of hefty investments made in its production capacity and can now aspire to an Investment Grade rating.

Loxam, Kiloutou, Boels, Modulaire: equipment manufacturers and the sharing economy

Renting equipment is a way of ensuring it is used in an optimal manner and of extending its lifespan, thereby reducing the overproduction of equipment and keeping resource wastage to a minimum. In addition, equipment rental firms often apply strict maintenance and repair practices, further prolonging the lifespan of their equipment. Rental firms are largescale buyers of equipment and therefore in a position to encourage construction equipment makers to speed up their transition to vehicle electrification. Furthermore, Loxam encourages its clients to switch to electric-powered equipment by renting out such equipment at the same price as ICE-powered equipment, even though the former is still more expensive at purchase for the time being. From a financial perspective, we appreciate the fact that these companies are able to deliver countercyclical cash-flow generation. This means it is easier for them to adjust to any economic slowdown by rapidly slashing their investments in fleet expansion, as evidenced in 2020 during the Covid-19 crisis.

Moreover, we would point out that clients are heavily incentivised to hire their equipment during periods of economic uncertainty, as this is a more flexible alternative to purchasing new equipment. Each of these companies delivered healthy revenue and EBITDA growth in 2023 while keeping their debt levels under control. Looking at 2024, we are still confident that these firms are capable of adapting quite easily to a less buoyant macroeconomic environment, especially in the building segment.