CNP Assurances: Perpetual return

CNP Assurances returned to the subordinated debt market on 12 November to price a Eu500m perpetual non-call 10 issue, with CA-CIB as a joint bookrunner. Vincent Damas, director for ALM and funding, and Stéphane Trarieux, funding and rating agencies department, CNP Assurances, explain the rationale for the company’s follow-up to its 31NC11 in May, and discuss structural and market developments.

Bank+Insurance Hybrid Capital (BIHC): After your dated subordinated transaction in May, what was the rationale for returning with a perpetual transaction at this time?

Vincent Damas, CNP Assurances: The outstanding subordinated debt of CNP Assurances currently amounts to Eu5.7bn, which ranks us in line with the average of listed European insurers in terms of volume. It is important to note that CNP Assurances has never issued any senior unsecured debt because the issuing entity is the main operational entity of the group and has excellent liquidity, and hence does not require any senior funding.

Our issuing strategy is generally to flatten our maturity profile by distributing our outstanding debt across various maturities. We aim for a benchmark size to ensure investors the liquidity they require, but do not issue in jumbo size as it does not suit our maturity profile and secondary performance is more uncertain. We also look for diversification in terms of currencies, investor bases and formats. A new undated Eu500m transaction was perfectly in line with this strategy and was all the more interesting since prevailing conditions are in issuers’ favour.

BIHC: Insurance perpetual instruments experienced strong volatility at the end of September/beginning of October. Do you see any particular reason for this? How did it affect your decision to go ahead with the project?

Stéphane Trarieux, CNP Assurances: We have indeed observed that the market was not ideal in September and this continued until mid-October. The international context and disappointing growth figures of different regions have led to a correction on a number of risk assets. Needless to say, subordinated issues suffered from this a bit, as is to be expected.

We still thought that there would be some issuance windows open until the end of 2014. As a result, we prepared ourselves in terms of issue documentation to be ready to seize the first opportunity after our quarterly results’ release.

BIHC: Pricing with a premium of just 40bp over your dated transaction seems to be a very good result — how would you compare the outcome versus where your peers are trading?

Damas, CNP Assurances: We have noted that the spread differential between dated and perpetual debt has varied between issuers and is not constant over time. This can be driven by technical factors. The 40bp that you mention includes both the perpetuity cost and the new issue premium. We view the final outcome as very satisfactory in light of market conditions.

BIHC: With over 400 investors involved in this transaction, have you seen any change in the distribution of this deal compared with your previous transactions?

Trarieux, CNP Assurances: Compared to our euro 31NC11 issue in May, the book was bigger in terms of total amount (Eu6.5bn versus Eu5bn) and the number of investors (400 versus 340). We continue to observe a high level of granularity within our investor base and good geographic diversification. This is the results of CNP’s efforts over the last two years to strengthen the relationship with credit investors by means of non-deal roadshows.

BIHC: You achieved a very nice 4% coupon — how does it compare with the average cost of your solvency capital?

Damas, CNP Assurances: This new issue, as well as the dated one from May, enables us to reduce the average cost of our subordinated debt, which currently stands at 5.4% before tax. Of course the current level of interest rates is very favourable for issuers. We also see that credit spreads are at their lowest levels of the last five years — although they are still wider than before the 2008 sub-prime crisis. This level of coupon enables us to keep a significant safety margin in our interest coverage ratio, which is closely looked at by rating agency Standard & Poor’s.

BIHC: What is your view of future Solvency 2 Tier 1 instruments?

Trarieux, CNP Assurances: We think that primary markets will soon be ready to absorb fully compliant Solvency 2 Tier 1 from insurance companies, as they did for bank AT1s.

However, since the final technical guidelines are not yet finalised, it is still too soon to say when the first transaction will take place. We will closely follow the upcoming regulatory developments (Level 3 measures) in order to be ready when needed.