North America Financial Bond: Equitable’s US$600m P-cap
Blazing the trail Equitable’s effort to replace a legacy precapitalised trust security was a rare case in which an issuer and its bankers reimagined what is usually a routine exercise in capital markets.
A form of emergency financing for borrowers, P-caps have existed for close to a decade. The notes are issued out of a trust that holds Treasuries bought with the offering’s proceeds. When the borrower needs liquidity, it can issue senior unsecured notes in exchange for the Treasuries, which can be sold for cash.
Yet as some of the older generation of P-caps start to approach their expiration dates, such securities risk losing their raison d'etre – to provide a longer-term source of contingent capital beyond what a bank could supply with a revolver loan.
Equitable was facing that very issue in 2024. The life insurer’s 2029 P-cap had only five years left before it matured, but the security’s trust structure meant a straightforward refinancing was out of the question.
“How do we manage the existing securities? How can we call it? It’s difficult because of the structure,” said Equitable’s head of financial risk Julien Zusslin.
The alternative could have been to issue another P-cap and let the older security lapse, but such an arrangement would be awkward, inefficient and potentially expensive.
Instead, the insurer and its bankers spent months wrangling over the problem to arrive at a complex yet elegant solution: it would draw from the P-cap trust and use the proceeds from the sold Treasuries to fund a tender offer targeting bonds that would be issued from exercising the trust. At the same time, Equitable would sell a new P-cap.
The potential for confusion meant banks had to hold investors’ hands through this one-of-a-kind liability management exercise that required investors to tender for bonds that did not yet exist. On top of that, Equitable was contending with the problem of reintroducing an esoteric instrument, only two of which had been issued in 2024.
In the end, the insurer printed a US$600m 30-year P-cap security at Treasuries plus 175bp on the back of US$1.8bn of final demand. Equitable also bought back US$570m of its debt via the tender, which also repaid some of its 2028 and 2048 senior notes.
“There was a lot of behind-the-scenes operational work to make sure this worked smoothly,” said Mark Watkins, head of US FIG debt capital markets at TD Securities.
With Equitable showing the way, issuers now have a viable template for rolling over P-caps that are getting long in the tooth.
The transaction’s sole structuring adviser and the tender’s lead dealer manager was TD Securities. JP Morgan and Goldman Sachs were fellow leads on the issuance and the tender.
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