Aviva: Friendly reopener

After six weeks without any financial institutions sub debt issuance, Aviva successfully reopened the market on 28 May with a dual tranche, Eu900m and £400m, Tier 2 offering. Here, Susan Sharrock Yates, deputy group treasurer, Aviva, discusses the UK insurer’s business and issuance strategies.

What was the rationale for your transaction and its timing? The lead managers noted at the time that it came after the Friends Life acquisition closed.

Susan Sharrock Yates, Aviva: There were a number of reasons. One was that over the next two years we have a number of opportunities to call existing subordinated debt, and we’ve also got a senior redemption next year. At the same time, interest rates are currently at historic lows — our funding rate on the most recent transaction is the lowest we have ever funded at in subordinated debt. So, mindful of the attractiveness of rates and mindful of the fact that we’ve got opportunities to replace existing debt over the next couple of years, we thought it would be good to look at the market.

Over and on top of that with respect to timing, there is the fact that we’ve completed the Friends Life transaction and we were very keen — regardless, to be honest, of whether or not we were going to be financing — to get on the road and speak to debt investors, and tell them more about the combination and the benefits of the transaction. That was something that they clearly welcomed, and indeed we are going to be more pro-active in keeping in touch with bond investors going forward because they very much appreciated getting that update.

Were there any particular messages about Aviva and your strategy that you emphasised?

Sharrock Yates, Aviva: We particularly wanted to emphasise the fact that we have managed to achieve a number of the objectives we set out to do when Mark [Wilson, group chief executive] joined a couple of years ago. We set out our “cashflow and growth” strategy then, including a focus on balance sheet strengthening. Whilst we had already made progress on the leverage position, the Friends Life transaction helps accelerate the balance sheet transformation and leverage is now within our target range and in line with double-A rated peers. In addition, the Friends Life cashflow, including significant synergy benefits, will increase the strength of the Aviva group cashflow.

Did investors raise any particular points?

Sharrock Yates, Aviva: Not necessarily in regards to what we are doing, but the questions that came up in every single meeting were more about Solvency II, not surprisingly. And there are limits to what anybody can honestly say about Solvency II at the moment because the music hasn’t stopped.

Markets have been very volatile. Did the macroeconomic backdrop affect the timing and/or execution of the transaction?

Sharrock Yates, Aviva: Well to be honest we were actually ready to go prior to when we did go. We made sure that our Euro note programme was fully updated and that our regulator had given the necessary clearance for us to issue the debt we were proposing — it’s worthwhile getting all that done up front. And then once the Friends acquisition closed we were absolutely ready to go. But there were then a number of bank holidays, as well as our Q1 interim management statement, and we had to get them all out of the way.

And then we thought, well, markets are volatile, but we can’t see that improving over the short term at all, and we were keen to get something done before the summer. Fortunately, once we were ready to go we saw a slightly easing of volatility, and to be honest given our banking group and given our story, and the feedback that we had received from investors on the road, we were confident that we would be able to get something done.

We ideally would have liked to do something a little bit longer in the euro space, but given the volatility of markets and the lower rates, there wasn’t sufficient appetite in euros to go longer. But we were confident that we could issue the standard non-call 10 within that timeframe. And ultimately we were able to raise the upper end of what we were looking to do in terms of size.

How did the sterling tranche evolve?

Sharrock Yates, Aviva: As mentioned before, we were quite keen on having a longer tranche. Ideally we would have had a longer euro and a standard euro, so the issuance would have been all in euros. Because we have a large European presence it is quite useful to offset that with some debt on the balance sheet. But there wasn’t enough appetite from investors to do long euros — that isn’t just for our paper: generally it isn’t a market that supports longer maturity debt issuance.

We didn’t want to go too large on the benchmark 30 non-call 10, but given the level of rates we wanted to take the opportunity to lock in for a little bit longer, so we spoke to some of the investors to say, OK, you don’t want to do longer euros, would you do longer sterling? And the answer was, yes, we do have appetite in sterling for that longer paper.

Another thing to note is that now that the Level 2 text for Solvency II is published, there is greater clarity. Issuers are not going to have to potentially rely on grandfathering for deals to qualify for capital treatment. Over the last two years the PRA has — in contrast to other European regulators — been insisting that any debt issuance is absolutely in the direction of travel of the regulations. When we issued subordinated debt in 2013 and 2014 we therefore expected this to qualify directly, but limited the call dates to within the grandfathering period so that, had there been any last minute change, we would have grandfathering as a backstop. Now that the rules have landed we didn’t need to think about that backstop, that grandfathering; we could actually go for longer issues callable after the end of the grandfathering period.

So were you satisfied with the pricing and with the quality of the order book?

Sharrock Yates, Aviva: We are very happy indeed. As I said before, the pricing is historically the lowest rate we have issued at. And given the market backdrop I was very pleasantly surprised by the size and quality of the order book, which was almost Eu5bn equivalent, and we managed to tighten pricing 10bp inside the initial price thoughts. Just two weeks later book sizes were falling and price tightening of that order became very challenging, so we were fortunate in getting a bit of a sweet spot in the market before Greece and other concerns started rearing their heads.

To what extent does the prevailing interest rate situation affect your capital requirement/capital planning?

Sharrock Yates, Aviva: That was actually one of the questions that came up on the roadshow. Quite a few of our investors, in particular in continental Europe, asked how we were managing the low interest rate environment and if this was this a major concern for us.

Interest rate risk isn’t a risk we want to take, and we match our books accordingly. In our roadshow pack we had a specific slide looking at the low interest rate environment and the impact for us, and highlighting the fact that we’ve lowered or removed guarantee rates in our participating business throughout Europe.

Our published sensitivities, in our half year 2014 accounts, show that we are relatively insensitive to interest rates. For example, for a 50bp fall in interest rates across the yield curve, our sensitivity on economic capital is only about Eu0.1bn.

We therefore have low interest rate exposure compared to a number of our peers. The biggest risks we have are longevity, which is the nature of the business, and credit risk, which again is largely the nature of the business. However, as a composite with a diverse range of risks, a number of these risks naturally offset each other.

So whilst it isn’t a marvellous environment at the moment, we feel that we are better positioned than most.