Sterling Bond: Legal & General Group’s £500m Restricted Tier 1

IFR Awards 2020
2 min read
Philip Wright, Tom Revell

Take courage

It takes some courage to issue your first Restricted Tier 1 transaction three months into a national lockdown when there hasn’t been one at all for two months before restrictions began.

But that is exactly what Legal & General Group did in June. And it was well rewarded for its efforts, managing to raise the maximum amount targeted considerably inside guidance despite there being no new issue concession – and still attracting an order book that was seven times covered.

There was some background to the story, as the sterling market had played host to a number of successful Tier 2 issues that hinted at an investor community receptive to capital issuance. But it still took a leap of faith for L&G to make its RT1 debut.

The company itself had been a part of the T2 supply, issuing a £500m 30-year non-call 10.5 that had performed well, having tightened from 4.50% to around 3.98%.

With that in mind, lead managers Bank of America, Barclays, Citigroup, HSBC, JP Morgan and NatWest Markets opened books for the perpetual non-call September 2031 deal at initial price thoughts of 6.25% area.

With demand topping £4bn, guidance was set at 5.75% (plus or minus 0.125%) for an expected £400m–£500m, and the deal came at the tight end in the larger size.

L&G said it was issuing RT1 to strengthen its capital position while the longer-term economic impact of Covid-19 remained uncertain, and to position itself strongly for the recovery phase of the crisis.

The company reported at the time that it expected its shareholder solvency ratio to be in mid-160% at the end of the first half of 2020 with a surplus over SCR of around £6bn, excluding the RT1 transaction. That was down from 184% and a surplus of £7.3bn at end-2019.

"This deal will add five or six points of SCR to their ratio, which has been impacted by rates and credit downgrades in the last three to four months," said a banker at one of the leads.

And with funding levels at attractive levels, L&G had the chance to lock in an attractive coupon.

"The cost of RT1 looks great here," the lead banker said. "This is very cheap capital, pandemic or no pandemic. If you're an all-in issuer like insurance companies are, rather than a spread-focused issuer, these are terrific levels."

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