Swiss Re €800m Tier 2 timing ‘vindicated’ by demand, spread

Swiss Re became only the second insurer this year to sell a subordinated euro benchmark when it issued an €800m 32 year non-call 12 Tier 2 on Wednesday. Daniel Bell, head of funding at Swiss Re, discusses the issuer’s approach, which paid off as it drew more than €7.75bn of demand and achieved pricing arguably inside fair value.

Swiss Re Next web

What is the rationale for the new subordinated issue?

The new issue was part of our regular funding plan off our debt issuance programme aimed at supporting business growth. The notes will count as regulatory and rating agency capital and so supplement the group’s target capital structure in a low rate environment.

Why has there been the change in issuer/guarantor and what are the implications of that?

Changes to Swiss corporate tax laws effective 1 January 2020 make issuance at Swiss Re Ltd level (via its finance subsidiary Swiss Re Finance (UK) plc) more efficient, and more likely going forward, enabling more flexible use of proceeds throughout the group.

How have your key credit metrics been affected by the Covid-19 crisis and how do you expect these to evolve?

Covid-19 has certainly had an impact on the industry, but our capital position under the Swiss Solvency Test regime remains strong, with a peer-leading group solvency ratio as of 31 March 2020 comfortably above 200%.

How, if at all, has the Covid-19 crisis affected your issuance strategy?

We typically have a funding plan to complete each year to support areas of the business where we see growth opportunities. Covid-19 impacted our timing, but not our issuance strategy, as such.

Why did you feel this was the right time to approach the market?

We are fairly regular users of the March-June market window. To us, this was really the first time since the onset of Covid-19 where we felt some reasonable stability in the market, with better news on the virus and economies reopening. For that reason, issuing sooner just wasn’t feasible.

Daniel Bell Swiss Re web

We do see some potential macro risks on the horizon, with escalating tensions between the US and China, the situation in Hong Kong, and the US election in November. So, all in all, I think now was a good time to issue and the strong performance on the day of both the market and this transaction vindicated our view.

How satisfied are you with the outcome?

We were very satisfied with the outcome. We obviously chose a day with a supportive backdrop, but we also knew we had a good story to tell.

How did the level of demand and pricing compare with your hopes and expectations?

We have a very good relationship with our investors and it was evidenced here with the who’s who of the fixed income market again demonstrating their strong support for Swiss Re. Over 380 line items in the book also shows that support runs very deep. We had large books for our euro and US dollar transactions last year, so we were expecting a good response, but of course the backdrop was very different then. There was reasonable demand for other insurance transactions in the past few weeks but, in the current environment, to have a book in excess of €7.5bn even after significantly revising pricing was a pleasant surprise. On pricing, we felt our secondary levels prior to this transaction were wide of where fair value should be for us and so we were not particularly surprised that we were able to tighten as we did.

Your MSCI rating was included in the announcements around the trade — why did you flag this?

This was not a labelled bond, but we are aware that ESG credentials are a key factor for many investors. Swiss Re has been at the forefront of managing its business in a sustainable way on both sides of the balance sheet and we wanted to remind investors of that.

Is there anything else about the transaction you would like to highlight?

The only thing I would add is that I thought our syndicate of banks worked very well together and properly challenged each other to ensure we got a very strong outcome with this transaction.

Main photo: Swiss Re Next; © Leonardo Finotti, 2017