Subordinated bank and insurance paper issuance in the first three months of the year has broken all previous records. According to Dealogic, by the middle of March volumes for all internationally marketed subordinated bonds came to $43 billion, breaking the record for first-quarter supply established in 2005.
The significance of this new record become clearer once the fact that the 2005 first-quarter total of $41.8 billion was one-third higher than 2004’s is taken on board [see graph below]. There are various explanations for the phenomenal supply.
“March is generally a busy period, because financial companies are generally keen to take advantage of liquidity once out of their financial black-out period,” says Richard Boath, head of the financial institutions group at Barclays Capital.
“Looking at the drivers for issuance in 2006 compared with 2005 – isn’t it more of the same?” asks David Marks, head of FIG debt capital markets at JPMorgan. Marks points to the fact that spreads remain at historically tight levels and there is continued strong investor sentiment for financials. Banks and insurance treasurers are loth to turn down cheap capital.
Insurance
“We have had a bunch of stuff, much of which is M&A related,” says Boath. “One strong development is that insurance companies are increasingly managing their balance sheets in the same manner that banks have done for many years. Insurance companies are now able to count non-equity issuance as capital.”
On the rise:
Volumes of Internationally Marketed Subordinate Debt |
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| Source: Dealogic |
The UK’s Financial Services Authority now has insurance companies operating under the same regulatory regime as banks. In effect the FSA has fast-tracked the Solvency 2, which is the EU’s attempt to place the insurance sector on an equal regulatory footing to banks under Basle II.
“We are going to see a healthy increase in insurance supply driven by industry growth, balance sheet optimization/balance sheet leveraging and M&A activity like we have seen by Swiss Re and Allianz,” says Sid Prasad, head of FIG debt capital markets at Merrill Lynch. “We expect this year’s supply to surpass last year’s level of circa €15 billion.”
Some of the biggest deals in the pipeline are from insurance companies. In mid-March it emerged that Aviva had bid for Prudential, valuing the company at £16.8 billion ($29.3 billion). Although the deal is an all-share offer, there seems little doubt that the cost of goodwill will result in the need for a substantial hybrid capital raising exercise.
The insurance M&A theme is a recurrent one. Generali has upwards of €4 billion in hybrid capital lined up, with MedioBanca, HSBC and JPMorgan in place as bookrunners. Generali is buying-out minority stakes in various subsidiaries, which should set it back some €2.3 billion. The rest of the funds will be used to return cash to investors.
Swiss Re has mandated several banks for its upcoming hybrid transaction. Banc of America Securities, BNP Paribas, HSBC, JPMorgan and UBS are the names rumoured as likely bookrunners. The deal is again acquisition related. Swiss Re is paying $6.8 billion for GE Insurance Solutions.
Pre-emptive
Allianz recently sold €800 million of perpetual non-call five paper to retail investors via UBS, Dresdner Kleinwort Wasserstein and Deutsche. The deal was part of a refinancing of Allianz’s buyout of minority interests in Italian insurer RAS. Aside from this being an example of M&A-related activity, the Allianz hybrid was uniquely structured. Its composition pre-empts expected new capital-raising frameworks from national regulators.
“The terms of the transaction have been structured to cater for Solvency 2 developments. With the insurance regulatory environment changing in the European Union, and the UK being advanced in regards to their regulatory capital requirements, the transaction was structured to meet UK innovative tier 1 requirements in relation to insurance groups to the extent permitted by German corporate law,” says Frank Kennedy, head of FIG debt capital markets at UBS.
Last summer, Munich Re took a course similar to Allianz’s when it structured a hybrid deal to replicate bank tier 1 regulations but it used German rather than UK rules.
M&A related financing from banks is also contributing to the glut of issuance. Commerzbank issued its first-ever innovative hybrid, selling a dual-tranche £800 million and €1 billion deal via itself, Deutsche, DrKW and Morgan Stanley. Next up will be BNP Paribas’ refinancing of the €9 billion BNL purchase, which will be substantial. Most of the acquisition will be financed by a share capital increase amounting to €5.5 billion, but some €2 billion of this will come in hybrid form.