Allianz, Axa star as sub insurance hits sweet spot

Insurance hybrids proved the flavour of the month in the opening weeks of 2024, with Axa attracting peak demand of over €8bn to a €1.5bn inaugural RT1, while an Allianz €1.5bn Tier 2 was able to outperform bank issuance.

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The German insurer hit the market on 3 January alongside a liability management exercise, and the French followed on 9 January, with both deals standing out amid a busy opening fortnight for financial institutions supply.

“Insurance paper is by default usually subordinated and relatively long duration, which is exactly what investors have been wanting to buy in January,” said André Bonnal, FIG syndicate at Crédit Agricole CIB, joint bookrunner for both Axa and Allianz. “Because of the consensus around rate cuts, investors are happy to get much more engaged in duration trades than they were for the best part of 2023.

“Similarly, subordinated products are where people see the highest probability of capital gains throughout 2024 due to the rate cuts and they are anticipating a compression trade from sub into senior. So it makes perfect sense that the trades that have come in the insurance space so far have been extremely strong.”

A degree of insurance issuance had been anticipated this year, as companies more actively manage their stock of Tier 1 bonds grandfathered under Solvency II, including perpetual non-call 2024s and 2025s, that will lose eligibility in January 2026. A Restricted Tier 1 (RT1) issue from Axa had thus been anticipated, with the French insurer having insufficient capacity to refinance its whole stock of grandfathered bonds with solely Tier 2.

With the last euro RT1 issuance having been a €2.5bn dual-tranche deal for Allianz in September 2021, investors were meanwhile keen to be presented with fresh supply.

“Investors clearly loved this Axa trade because it’s an on-the-run liquid bond from a top-notch issuer in the sector,” said Bonnal. “The feedback we’ve had from investors for some time is that RT1s are really lacking liquidity, which is a big negative versus AT1 — even if RT1 maybe in some respects feel a bit safer, especially in call policies and anticipation of calls.”

The perpetual non-call 10 transaction, rated Baa1 (hyb)/BBB+ (Moody’s/S&P), was announced on 8 January, teeing up a one-and-a-half day process, with 90 investors participating in calls and the pre-marketing yielding around €1.5bn of indications of interest. Feedback ranged from mid to high 6% to as much as mid-7%, according to Bonnal, and the following day initial price thoughts of the 7% area were given for a euro benchmark-sized deal.

“We very quickly had a €2bn book and then doubled that in about an hour and a half. By the time we had the book above €8bn and set the coupon at 6.375%, investors knew the trade was going to work with or without them and some probably stuck with it even if the price was through where most saw fair value — we had virtually no attrition, just €200m-€300m.

“So the issuer could take out €1.5bn and the bond has been trading up since then, which shows you that at the end of the day it was seen as the right price.”

Fair value had initially been seen at around mid-6% via both of two approaches: Axa 30 non-call 10 Tier 2 was seen at mid-swaps plus 225bp, with 175bp then added as an RT1 premium matching the differential between best-in-class bank Tier 2 and AT1, and 400bp then translating into the 6.5% area; and putting the level flat to where Crédit Agricole had issued a €1.25bn 6.5% perpetual non-call 2030 AT1 a week earlier, with investors — as alluded to previously — seeing the AT1 as a more liquid reference and considering the insurer and bank as French national champions in their respective sectors.

The final book was above €7.8bn, comprising a Who’s Who of real money investors in subordinated debt, according to Bonnal, with more than 10 triple-digit orders and UK asset managers constituting around one-third of demand and French some 15%.

Allianz’s new €1bn 30.5 non-call 10.5 Tier 2 was executed the same day as an any-and-all tender for its grandfathered €1.5bn perpetual non-call September 2024 Tier 1 issue. The issuer said the exercise was part of its proactive management of its financing structure, while offering noteholders the opportunity to trade out of the old issue and into the new.

The tender offer ran until 10 January. €874.3m of bonds were successfully tendered at 99.60% for a cash premium of 0.30%, with around 20 holders having rolled their positions at the time of the new issue.

“The liability management exercise helped substantially,” said Bonnal (pictured), “with some investors putting in double the amounts they were tendering, and their bids also probably stickier because they were rolling existing positions.”

With IPTs of the mid-swaps plus 255bp area, the new issue — rated A1 (hyb)/A+ — was launched into a busy and softer FIG market than the previous, opening day of 2024. Combined with investors assessing the tender terms, this led to only steady bookbuilding. However, after a first update of above €1.5bn, the size could be set at €1bn and the spread at 235bp — a 17bp new issue premium — on the back of books above €2.35bn, which held firm in spite of the 20bp tightening.

“Kudos to the issuer,” said Bonnal. “They could have gone for a tighter outcome but they decided to leave a bit more on the table because the market was choppy and they wanted to ensure that there was going to be secondary market performance.

“On the same day, you had a handful of banks, including national champions, all paying 20bp-plus of NIP for HoldCo/SNPs,” he added, “so Allianz outperformed, showing that — all else being equal — you’re looking at a better trade with subordination and duration.”

Italy’s Generali opted for senior format for a €1.25bn dual-tranche green bond issue (rated A3/A+/A by Moody’s/Fitch/AM Best) on 8 January.

The insurer was able to tighten pricing 15bp for five and 10 year tranches to 65bp and 95bp, respectively, and achieve its targeted €1.25bn maximum size with €500m and €750m tranches, thanks to having achieved a peak book above €2bn, although the deal was only around 10% oversubscribed at re-offer.

Market participants attributed the easing of demand to competition from a varied primary market menu being shown to investors on the same day, and the very tight levels achieved by Generali both on an absolute basis and relative to Italian corporates and national champion banks in similar tenors.

The issuer said the outcome was successful and confirmation of its credit and its approach to sustainability, with the green bonds being its sixth and seventh, and bringing the total number of bonds it has issued with ESG features to eight.

“Green and sustainable bonds are expected to represent around 40% of our total outstanding financial debt by the end of 2024,” said Generali Group CFO Cristiano Borean. “This result is fully in line with the objective of a cost-efficient debt management, combined with a strong commitment to sustainability, outlined in the ‘Lifetime Partner 24: Driving Growth’ strategic plan.”

A €650m ($708m) seven year New York Global Funding issue today (Tuesday) showed promise for funding

agreement-backed notes (FABNs) in Europe, coming with no issue premium versus secondaries and at a level only a few basis points above US pricing.

New York Life Insurance Company could also increase the size of the Aaa/AA+/AAA deal from an expected €500m after the leads were able to tighten pricing from initial price thoughts of 105bp-110bp to 80bp on the back of a peak €1.5bn-plus book.

According to Bonnal at joint bookrunner Crédit Agricole CIB, the pricing implied zero NIP and was around 3bp back of where New York Life would have printed an equivalent dollar trade, meaning effectively no additional premium was paid for the investor diversification it achieved.

“The tenor was great for investors wanting a bit of duration for super-well rated paper that still offers good value versus best-in-class corporates – such as Nestlé’s recent seven year, currently at 37bp — and best-in-class bank senior preferred — such as CASA at plus 90bp in this part of the curve,” he said.

“This is still a small market, but it is gaining traction as more and more issuers come in euros and sterling,” added Bonnal, “making the FABN sector more known in Europe, thereby helping counter a bit the lack of liquidity of the sector.”