This type of bond is so valuable because the coupons are fixed for life, with no built in step-up. Issuers can leave the capital outstanding indefinitely and only refinance the notes if a better funding opportunity emerges later.
Windows in which to issue this type of debt are few and far between, however. Market access depends heavily on appetite among the Asian investor base and private banks in particular, which prize the simplicity of a fixed coupon paid to perpetuity.
“It takes quite a bit of skill and confidence to read the market and go ahead with the transaction,” said Christian De Monte, head of insurance debt capital markets at Morgan Stanley, a bookrunner on the deal.
High Asian allocations in US dollar insurance deals priced earlier in the year gave the first inkling that the fixed-for-life market was on the brink of a comeback. Private banks also showed a willingness to provide leverage to high net-worth investors, another key factor to getting the ball rolling.
Volatility in the equity market was helping push investors towards credit, and the rare high-rated, high-coupon paper was an attractive prospect to yield-starved investors in the low-rate environment.
Prudential spotted this confluence of factors and was first out of the blocks in late May with a US$1bn Tier 2 perpetual non-call five transaction, its first Reg S US dollar issue since 2013.
It was priced at 5.25%, well inside initial price thoughts of 5.75% area, on over US$11bn of orders from more than 400 investors. Some 79% of allocations went to Asia, and 58% to private banks, banks and retail accounts.
Prudential’s deal was neither the largest nor tightest of the five trades that emerged, but it unlocked a market that grew into one of the year’s major themes in the financial sector, particularly in a year when Additional Tier 1 issuance by banks failed to gain much momentum.
It rallied more than six points in August and weathered the sector’s subsequent brutal sell-off, to the extent that it could return for a US$725m follow-up trade in September.
“They were very keen for it to be seen as a success both for the issuer and for investors,” said De Monte. “It left a positive feel in the market.”