AXA goes XL with Tier 2, SCOR raises RT1 bar

AXA launched the equal-largest European insurance subordinated debt transaction on 21 March, a EUR2bn 3.25% 31 non-call 11 Reg S deal that attracted over EUR4bn of demand, as it kicked off financing for its acquisition of XL Group.

AXA flags

AXA announced the acquisition of XL on 5 March for $15.3bn (EUR12.4bn), of which EUR3.5bn would be financed by EUR3.5bn of cash at hand, around EUR6bn from a planned US IPO and related transactions, and around EUR3bn via subordinated debt.

The latter part was begun on 21 March, when AXA approached the euro market with a Tier 2 trade. Following initial price thoughts of the 230bp over mid-swaps area, the pricing was ultimately fixed at 220bp over and the size at EUR2bn, with the book having totaled some EUR4.1bn.

“This highly successful transaction, in the midst of choppy markets is a testament to the strength of the AXA credit and XL Group acquisition rationale with the global investor base,” said a banker at one of AXA’s leads.

The transaction was indeed launched the week after market sentiment had softened on the back of factors including heavy supply. AXA also had to contend with a widening of its secondaries triggered by the announcement of the XL acquisition and its ratings being placed on negative review or outlook by the rating agencies.

AXA and its leads reacted to this confluence of events by going out with a new issue premium that syndicate bankers put at around 40bp. While this was deemed unprecedented for an issuer of AXA’s stature, it was also seen as understandable.

“It seemed crystal clear to everyone that the euro deal was going to be a big one,” said one syndicate banker. “AXA is one of those issuers that usually does not pay much in terms of new issue premium, but they had to play the game here given market conditions, elevated NIPs and the M&A feature of this bond. They had to pay up, at least at the start, to make sure they could have the size they wanted, which they eventually did while paying a NIP in line with other subordinated trade in the market

“They were able to get books were above EUR4bn, which is massive in the context of the market environment at the time. In the end it was a really smart and efficient way to get two-thirds of the planned sub debt financing done via this deal.”

The UK was allocated 45%, France 23%, Germany and Austria 11%, Nordics 7%, Italy 5%, Benelux 4%, Switzerland 3%, and others 2%. Asset managers took 70%, insurance companies and pension funds 20%, central banks and sovereign wealth funds 6%, hedge funds 3%, and others 1%.

SCOR RT1 achieves slim premium

SCOR launched the largest Restricted Tier 1 issue yet and the first RT1 in US dollars on 6 March, a $625m (EUR507m) perpetual non-call 11 transaction that attracted $3.75bn of orders and was priced at a only a modest premium to insurance Tier 2.

The resinsurer intends later this year to call two hybrids that are treated as Tier 1 under Solvency 2, and issued its first RT1 to refinance these.

Its instrument differed from the only euro RT1 yet, ASR’s EUR300m deal in October, in having a temporary write-down structure.

See special RT1 feature for more on SCOR’s structural features.

According to André Bonnal, insurance sponsor on the FIG syndicate desk at joint bookrunner Crédit Agricole CIB, price discovery was far from straightforward given the lack of RT1s outstanding.

ASR’s RT1 was trading as close as 85bp  over its Tier 2 in euros, but he noted that the ability of SCOR to offer a coupon of 5%-plus in US dollars, and thereby target Asian accounts, meant that pricing could diverge from ASR’s 4.625% euro precedent. Investors looked in US dollars to Australian QBE’s perpetual non-call 2025 AT1 and Swiss Re’s perpetual non-call 2022 as references.

After initial price thoughts of the 5.75% area for a $625m no-grow transaction, guidance could be revised to 5.375%-5.5% on the back of $2.75bn of demand, and after orders topped $3.75bn pre-reconciliation, the final price was set at 5.25%, with some $2.8bn good at this level.

“A 31NC11 for SCOR would probably have been priced in the context of the high 4s, so you are talking about very little extra, 37.5bp-50bp, for the differential between Tier 2 and RT1, which is amazing,” said Bonnal.

“It is also notable for being the first big RT1 from a French issuer but also from a big reinsurer.”

Bertrand Bougon, head of ratings and capital, and Gabriel Hauvette, capital management manager, at SCOR said they were highly satisfied by the outcome.

“We issued at a rate of 5.25% in US dollars, with a final book that more than four times covered our needs,” they said. “And we swapped the debt for the next 11 years at a rate of 2.95%, i.e. a spread in euros of 170bp, the tightest among European bank and insurance Tier 1 issuances.

“The strong demand from investors was supported by the A- rating by S&P, since this is the only Tier 1 issuance in that rating range. Overall, we are very grateful to our investors for their support and trust.”

RT1, M&A to rise with Phoenix

With first euro and now dollar benchmarks having been launched in the past two quarters, the RT1 market has gained momentum, and further supply is expected soon.

Phoenix Group on 13 April announced an RT1 mandate with a roadshow taking in Asia and Europe beginning on 16 April, ahead of a planned benchmark issue comprising a perpetual non-call 10 in dollars and/or a perpetual non-call 10 or 12 year, with a write-down structure. The notes are expected to be rated BBB- by Fitch.

The UK group’s RT1 is being planned following the £2.93bn acquisition of Standard Life Assurance announced on 23 February. Phoenix said it expects to fund £950m of the cash consideration of £1.971bn via a rights issue, and the balance from up to £1.5bn of underwritten debt facilities and up to £250m of own cash resources.

According to CACIB’s Bonnal, Phoenix’s plan brings together and highlights two interlinked themes he expects to play out in the insurance sector.

“One is the RT1 market, which we know is a hot topic and is going to be at the forefront of insurance issuance,” he said. “We have had Aegon say that they are looking at the RT1 market and we know that other issuers are looking at the instrument to refinance old legacy Tier 1 bonds.

“And the other angle is M&A-related deals — we have seen AXA, but also Phoenix now. So we will see more supply than usual on the insurance side, on the back of this M&A activity, and some of that supply is probably going to come in RT1 format.”