Swiss Re had a specific need. The reinsurance giant wanted to replace perpetual bonds that had incorporated an any-time put feature and had been sold to fixed-income investors.
“We felt that feature was better suited to equity-linked investors,” said Daniel Bell, head of funding at Swiss Re. The cost would also be lower.
The solution was two years in the making and far from simple, requiring equity-linked, hybrid capital, derivatives and fixed-income teams working together with lawyers.
At its heart this was a US$500m six-year issue of non-dilutive convertible bonds – a structure that may not be old but that seemed to have outstayed its welcome in equity-linked, as Carrefour found when its NDCB offering could not be fully sold in March.
The any-time conversion right for the issuer and call option hedge provided a “market-friendly solution to cost-effective capital on tap”, said Armin Heuberger, head of EMEA equity-linked at UBS, a bookrunner alongside Bank of America Merrill Lynch, Barclays, Deutsche Bank and JP Morgan.
“The structure insulates Swiss Re from unforeseen and unquantifiable risks and is dilutive only at Swiss Re’s discretion as the convert is hedged via a mirroring call option.”
If conversion takes place when the insurer’s solvency ratio is below 160% of the minimum regulatory capital requirement, then a floor price of 50% of the reference price applies. At issue, the Swiss Re solvency level was 269% of the minimum and it would take five one-in-200-year events to get close to the 160% level.
“You would need all five events to take place so quickly they can’t take another remedy,” said Xavier Lagache, head of EMEA equity-linked at Deutsche Bank.
Nonetheless, a hurricane in the US put a potential September 2017 transaction on the back-burner as it could have been interpreted as driving the deal.
In order to ensure the complexity would not limit interest to just hedge funds, bankers ran a two-day pre-sounding process, resulting in around 60% of the deal being allocated to outright investors.
The result was a 3.5% coupon, higher than would have been possible with a vanilla CB from a Single A rated company but an estimated saving of over 100bp versus selling to fixed-income investors.
It remains to be seen if the structure will be replicated, but it is another option for bankers to pitch, and shows the flexibility for structured equity to solve bespoke issues.
“The transaction is something we could look to replicate and maybe build upon,” said Bell. ”Prior to redeeming the perpetual bond in September 2017, we had two bonds with roughly US$1bn outstanding that we could convert into equity. This transaction replaced the first bond. The second bond was redeemed in September 2018. This transaction shows that we have good access to a new investor base and could therefore do more but we would not want to do too much.”