Financial Bond - Subordinated Debt
Allianz’s perpetual hybrid issue paved the way for other insurers keen to satisfy ratings agency demands. Because the issue did much of the footwork for its peer group, the €1.5bn 5.50% Perpetual (2014) Insurance Hybrid Capital is IFR’s Financial Bond (Subordinated Debt) of the Year.
The year 2004 provided a refreshing return to a broad product spectrum, which saw the retail and institutional, fixed and floating arenas busy, and structurers back to their creative best.
While CMS-linked issues and a latter resurgence in fixed-rate transactions kept the retail sector busy, the bulk of innovation was reserved for the insurance industry, where convergence between the regulatory treatment meted out to banks and insurance companies led to a new realm in which financial engineers could ply their trade.
Many of the transactions that emerged were one-off – Standard Life with its mutuality, the Society of Lloyd’s with its own peculiar structure – and so did not create a template that others could use in the future. But what distinguishes a groundbreaking deal from an engaging novelty is that the concept can be repeated.
That is what Allianz achieved with its €1.5bn perpetual non-call 10-year step-up hybrid capital deal via Dresdner Kleinwort Wasserstein and Merrill Lynch.
“It set the theme,” said Cormack Hollingsworth of DrKW’s syndicate desk. “While it wasn’t the first perpetual or the first insurance Tier 1, it was the first to fit into the C Basket.”
Moody’s’ C Basket accreditation was the prize to win in 2004. Proceeds from the Allianz bond qualified for 50% equity treatment on Moody’s sliding A (0%) to E (100%) scale, and the bond’s structure, carefully fabricated over a period of months, qualified as 100% equity in S&P’s framework for hybrid capital.
“It was designed purely with the ratings agencies in mind,” said Amir Hoveyda, head of FIG capital markets at Merrill Lynch, which acted as structuring adviser as well as a joint bookrunner.
As with any new format, it was known that concessions would have to be made over existing dated paper, although calculating what they should be was far from a precise science.
To compensate investors for the perpetual nature, the leads estimated that 10bp was the right number. Another 10bp was added on as a coupon premium to take into account the non-cumulative/ACSM (alternative coupon settlement method) features – the same as the differential between bank Tier 1 and Upper Tier 2 paper – and yet another 10bp was the sop to investors in the new paper that could find themselves subordinated to ordinary shareholders should ACSM not occur.
This arrived at a total of 30bp, far less than the 40bp–45bp hoped for in some circles but still a number that Allianz’s head of corporate finance, Stephan Theissing, felt could be bettered. “We would naturally like to achieve a narrow margin,” was his unsurprising statement at the time the first guidelines were put out. He further intimated that his aspirations lay nearer a sub-30bp level over dated issues.
The first spread indications were at 140bp over mid-swaps, when Allianz’s 6.50% 2022 (2012) issue was trading at plus 112bp. Talk was of a €1bn issue. The one obstacle on the horizon was that Hannover Re was in the market with a €500m dated deal at the same. Fears were that one, if not both, bonds could be compromised.
But once Allianz had decided that the stars were sufficiently aligned, there was no stopping it. “To wait longer would have been to take a risk on interest rates and risk market liquidity disappearing,” said Theissing.
With orders amounting to €5.8bn, all the fears proved to be misplaced. This meant one thing as far as the spread was concerned, and the guidelines were immediately pared to 130bp–135bp. By the time the paper priced at the tight end of the range, general market tightening made this a 25bp premium over its dated issues, significantly inside the original estimations and more in line with Theissing’s aspirations. And if there were any concerns about irrational new issue exuberance, performance that has seen that differential narrow to 15bp since the bond’s February launch will have put paid to them.
In addition to being a groundbreaking issue that proved popular with investors at a level that made sense to the issuer, Allianz’s offering also answered many of the questions that had troubled borrowers in their quest to achieve C Basket status. As a result, it offered a blueprint for those that cared to use it rather than just being a amusing diversion.