Generali bullet starts insurance sub with a bang

Generali started subordinated issuance from insurers with a bang in January when it attracted over EUR5bn of orders to a EUR500m 10 year bullet and achieved its lowest ever coupon on a sub trade, highlighting the attractive opportunities for issuers away from callable structures.

Ahead of the Italian’s Tier 2 transaction, the only significant supply in the insurance space had been a EUR1.5bn senior deal for Allianz on 8 January, when the market was open for New Year business but conditions were relatively lacklustre.

Split into EUR750m seven and 11 year tranches, Allianz’s nevertheless deal attracted more than EUR2.5bn of combined demand, allowing pricing on each tranche to be tightened 15bp from initial price thoughts of the mid-swaps plus 80bp area and 65bp area, respectively, to 50bp and 65bp, implying new issue premiums of 9bp and 15bp-plus.

As credit markets turned increasingly bullish through January on the back of dovish central bank noises, primary market conditions turned more attractive and the insurance sector proved ripe for new issuance.

“After having outperformed in 2017, the insurance sector was one of the worst performers in 2018, and we also had the general widening that occurred in to the end of the year,” said André Bonnal, FI syndicate at Crédit Agricole CIB.

“However, it offered some quite interesting entry points for cash rich investors, and we then saw the sector really performing and spreads tightening substantially, similar to what happened in the banking sector.”

Generali moved to take advantage of the receptive market by announcing the mandate for its EUR500m no-grow 10 year bullet Tier 2 issue on the morning of 21 January.

Following initial price thoughts of the 4.625% area, the leads after two hours set guidance at the 4.125% area, plus or minus 0.125%, with books above EUR5bn. They then moved inside this guidance on the back of over EUR4.25bn of demand and over 400 orders at the tighter level to set pricing at 3.875% — which the leads said was inside fair value of 4%-4.1%.

“It was clearly a blow-out,” he added. “I don’t think you’ll find many investors who dislike their capital generation, business model and capital metrics. The only concern may be that it is partly Italian risk, but at the same time that means you get really well compensated with a much higher spread than you would otherwise have for such a strong name.”

Generali group CFO Cristiano Borean said the deal was issued in line with the insurer’s plan to reduce its financial debt over a three year period and lower interest expense, with the EUR500m issued to reimburse EUR750m, “with a significant reduction in the cost of debt”, and the EUR250m difference financed from internal resources.

“The success of this transaction reflects our solid financial position and the trust investors have in our group’s strategic plan announced in November 2018,” he said.

“The 10 years bullet structure ensures the preservation of the Solvency 2 quality of capital and provides our credit investors an additional instrument through which take exposure to Assicurazioni Generali debt.”

Bonnal (pictured below) said that as well as coming through fair value, the 10 year bullet Tier 2 was priced around 75bp inside where Generali would probably have priced a 30 non-call 10 instrument, noting that, not being rated by S&P, the Italian has greater flexibility to choose between the bullet and callable structures.

“Investors overall tend to prefer simpler, bullet structures over callable ones, especially those who are not so well versed in the insurance sector,” he added, “and even if it only makes a difference at the margin, the prevailing pricing differential achieved showed that it is definitely worth considering.”

The next insurance Tier 2 issuer into the market, CNP Assurances, followed Generali’s example to similar effect.

The French insurer’s leads went out with IPTs of the mid-swaps plus 250bp area for the EUR500m no-grow 10 year bullet on 25 January, before moving to guidance of the 225bp area and re-offering the paper at 215bp over on the back of some EUR3.3bn of demand from around 220 accounts. The pricing was deemed flat to fair value and, as for Generali, marked the lowest coupon achieved by the issuer on a Tier 2 deal, 2.75%.

According to Bonnal, the re-offer was also some 62.5bp inside where a 30NC10 would have been priced. He noted that CNP Assurances opted against a 30NC10 despite being rated by S&P, as the insurer is very well capitalised under the rating agency’s metrics and highlighting just how attractive the bullet structure was at the time.

Subsequent issuers, however, returned to the more traditional callable structure.

Zurich Insurance, via Argentum Netherlands BV, issued its EUR500m no-grow deal on 11 February, going out with IPTs of the 240bp area before moving to guidance of the 225bp area, plus or minus 5bp, will price in range, on the back of books in excess of EUR1.85bn. The transaction was re-offered at 220bp over on the back of more than EUR1.9bn of demand good at that level.

Swiss Re then attracted EUR3.4bn of demand to a EUR750m 30NC10 on 14 March, allowing it to tighten pricing from IPTs of the 215bp area to guidance of 190bp-195bp, and ultimately a re-offer spread of 185bp. Both the Swiss trades were priced flat to fair value amid an ever-tightening market.

“They illustrate how indiscriminately strong the primary market has become,” said Bonnal. “Investors have paid scant attention to whether or not there was any premium in a trade because they need to put money to work. And once it is clear the books are multiple times oversubscribed, they know it is going to perform.”

Two weeks later Swiss Re attracted even more demand for a $1bn (EUR884m) 30NC10 Tier 2, pulling in over $6bn of orders on 27 March and tightening pricing from initial talk of the 5.375% area to 5%, implying a new issue premium of flat to 12.5bp.

“It was the their first issue in 144A/Reg S format for quite a while, so there was a big pool of US onshore investors they could tap into,” said Bonnal.

Marsh & McLennan had been similarly successful crossing the Atlantic in the other direction on 27 March, when it generated over EUR10bn of demand for a debut EUR1.1bn dual-tranche euro senior OpCo trade. Pricing for the EUR550m 7.5 and 11 year tranches was tightened by 30bp during execution thanks to the level of demand, but Bonnal noted that this was still 40bp-50bp wide of where the issuer traded in dollars.

“The spread they were showing for a strong triple-B/single-A American P&C company really helped,” he said, “particularly if you are a currency agnostic investor who is likely invested in Marsh dollar bonds and could get your hands on the same credit at a premium over the dollar curve.”