Investment-Grade Bond: AIA’s US$1bn Tier 2 bond
Locking in success
Hong Kong-headquartered insurer AIA Group built on its strong reputation in the US dollar market with a US$1bn Tier 2 bond sale in March, introducing a new lock-in feature to Asia Pacific that earns it the distinction of best investment-grade bond of the year.
The mechanism, which resembles a coupon deferral structure seen before in Japan and Europe, is triggered if the group capital drops below the minimum level required by regulators, or if redeeming the notes would have that effect. If that happens, the principal redemption at maturity and the final coupon payment will be deferred, but the coupon will continue to accrue and will be paid, with the principal, when the issuer meets the capital requirement.
Discussions with regulators were needed to explain the subordination and earn a green light for the new structure. AIA’s 5.375% 10-year subordinated bond has regulatory capital treatment for its whole lifetime, translating to a more capital-efficient structure for the issuer than a conventional Tier 2 note where capital recognition amortises in the last five years.
The insurer and arrangers spent time ahead of the launch to educate investors – work that paid off, as the order book reached US$8.5bn from 490 accounts at reoffer. The deal was priced at 99.086 to yield 5.495%, equivalent to a Treasury spread of 125bp, which was 30bp inside initial guidance.
The lock-in feature made it challenging to determine where the notes would land. Within the syndicate, opinions on the correct pricing differed by about 30bp, and the issuer took a pragmatic approach in considering 140bp–150bp for a landing point, a banker said.
Despite the lock-in being new to investors, AIA paid little to no premium over its curve, as investors acknowledged that the chance of the lock-in being triggered is very low.
It also helped that AIA was able to benefit from the new S&P insurer capital adequacy methodology that was published at the end of 2023. The guidelines recognise debt instruments with a loss-absorption clause from a non-operating holding company as debt-funded capital, meaning the AIA notes are treated as such until the maturity falls below one year. S&P rated the notes A–, one notch below the insurer’s 2040 subordinated notes, while Moody’s and Fitch rate it A2/A, in line with the 2040s.
The work on the March transaction allowed AIA to follow up with another lock-in trade in September, a US$1.25bn dual-tranche subordinated offering that debuted a 30-year tenor.
HSBC, Wells Fargo Securities, Bank of America, Goldman Sachs and Morgan Stanley were joint global coordinators, as well as joint bookrunners and lead managers with ANZ, Credit Agricole, Deutsche Bank, ICBC Asia and Standard Chartered.
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