Best borrowers 2007: Best insurance borrower: Swiss RE


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The reinsurer’s sophisticated use of the ABS market is now matched by its use of the unsecured markets.

Euromoney’s borrower awards 2007
Overall awards
Best sovereign/supranational/agency borrowerBest bank borrower
Best insurance borrowerBest ABS
Best CDO borrowerBest covered bond issuer
Best corporate borrowerBest high-yield/leveraged finance borrower
Latin America regional awards
Best sovereign borrower Best corporate borrower
Best financial borrower
Central & Eastern Europe regional awards
Best sovereign borrower Best corporate borrower
Best financial borrower
Asia regional awards
Best sovereign borrower Best corporate borrower
Best financial borrower
Middle East and northern Africa regional awards
Best borrower

Jürg Hess, Swiss Re

"For the amounts needed in connection with the GEIS acquisition we had of course to go to the institutional market. I hope we have left a good impression" Jürg Hess, Swiss Re

As a borrower, Swiss Re is known for its highly sophisticated use of securitization markets. But in debt capital markets it had kept a far lower profile – at least until recently.

In a little over a year, as part of a multi-billion dollar acquisition financing package, the reinsurer conducted four hybrid benchmarks in textbook fashion. Furthermore, it reopened the US hybrid market, for which it deserves kudos as it was considered a brave move by market participants at the time.

"Swiss Re has been issuing hybrid capital for quite some time, sometimes also using markets that were a little less public. For example, in 1998 we did a hybrid in loan format with bank investors. However, for the amounts needed in connection with the GEIS acquisition we had of course to go to the institutional market and I hope we have left a good impression," says Jürg Hess, treasurer of Swiss Re.

"Last year’s capital markets transactions were driven by Swiss Re’s acquisition of Insurance Solutions from GE. We raised a total financing of $7.6 billion," Hess explains.

Having sold a Sfr1 billion ($813 million) mandatory convertible in December 2005, in May 2006 Swiss Re kicked off the debt-related part of its refinancing of the acquisition.

"We always planned to have a euro tranche and a US dollar tranche: not only are these currencies the deepest market for hybrids but we also wanted the mix of exposure to these currencies. Everything was looking fine when we were preparing the transactions and then the NAIC [the US insurers’ regulator] came out and questioned whether certain hybrids should be classified as common equity rather than preferred instruments. That brought the market to a full stop," explains Hess.

The National Association of Insurance Commissioners shocked the bond market when it started classifying hybrid securities as common equity, as previously they had been defined as preferred for insurance investors. This shift dramatically increased the risk capital insurance company buyers had to allocate against hybrids and thus halted demand from the biggest buy-and-hold investor base.

"On the one hand we had to fund this acquisition, on the other we knew one of the biggest markets had just shut down," Hess says.

Swiss Re wanted to raise $2 billion equivalent, of which at least $500 million would have been in dollars. Although the borrower initially had concerns that demand would be severely affected, after conducting some research it decided that there was still sufficient interest for hybrids among US buyers because only 30% of hybrid buyers were sensitive to the NAIC’s deliberations.

"By admitting that you don’t think that the US market is available to you there might have been negative consequences for spreads and Swiss Re wanted to avoid being held hostage by the European investor base. Moreover it is certainly a sign of strength if you can reopen a market," says Hess.

Andreas Weber, head of corporate finance, explains that there was another important rationale for accessing the dollar market. "There was also a strategic element for our funding strategy; Swiss Re has a major business presence in the US and we have increased that through the acquisition so it made sense to establish our presence in the US – we wanted some liabilities in US dollars."

Three days into the roadshow, orders started coming in at what the company and lead managers JPMorgan, UBS and Bank of America thought were fair levels. In the end there was an order book of $2 billion for the dollar transaction and €6 billion for the European – led by Dresdner Kleinwort, HSBC and UBS. So Swiss Re was able to print $750 million and €1 billion equivalent. The deal was a perpetual non-call 10 and was classified as Basket D by Moody’s.

Swiss Re’s finance managers explain that they are always trying to find new investors and since both US dollar and euro markets had been utilized recently it made sense to move into alternative currencies in 2007. Opting for the sterling market was an obvious move but Australian dollars was less so.

Unfortunately, when Swiss Re hit the UK in March, volatility hit the financial markets globally. The bond’s size was £500 million, with Swiss Re going for quality rather than size. "It was at the height of the sub-prime crisis – clearly it was the wrong time to push for size," says Hess. The deal, via Barclays Capital, Deutsche Bank and UBS, had a non-call 12 structure rather than 10, with the borrower achieving an additional two years’ maturity for a minimal extra.

Swiss Re prepared the ground in December for an Aussie dollar deal by conducting a non-deal roadshow. About a month after its sterling foray the company completed the biggest ever tier 1 into the Australian market for A$750 million, via Deutsche Bank, UBS and Westpac.