Setting the standard
AIA Group led Asia’s insurance sector into a new regulatory era with a ground-breaking subordinated bond, setting an example for others to follow even before final capital rules had been introduced.
The Hong Kong-based, pan-Asian insurer in September launched a US$1.75bn 20-year subordinated note, its largest US dollar bond so far and its first capital security.
The timing of the deal was significant: AIA structured the notes to qualify as Tier 2 capital under Hong Kong’s group-wide supervision framework, even though the regulation is not due to take effect until the end of March. In a year wracked with uncertainty as a result of the coronavirus pandemic, AIA moved quickly to take advantage of an improving market and provide long-term clarity around its regulatory capital position.
A strong order book of over US$10.3bn allowed the issuer to beat its initial target of US$1bn and price at Treasuries plus 175bp, coming 35bp inside initial price thoughts and around 5bp–10bp inside fair value, based on its outstanding senior bonds. AIA’s Tier 2 notes are rated A3/A–/A, compared to its senior ratings of A2/A/AA–.
AIA spent two days explaining the new security and regulatory regime to global investors, ensuring it captured attention on a day when US$21bn of investment-grade deals printed in the US.
Hong Kong’s new risk-based solvency framework for insurers resembles the European Union’s Solvency II regime, but with some tweaks. Coupons are mandatory for the AIA Tier 2 bond, while they can be deferred in the European model if the issuer’s solvency capital ratio drops below a trigger level.
The regulatory credit of AIA’s Tier 2 bonds falls away in the final five years, losing 20% of their value as regulatory capital per year, which is another change from the Solvency II model.
AIA became only the third financial institution in Asia Pacific to issue a 20-year subordinated bond. The rare 20-year tenor was the optimal instrument as the insurer had no need to defend its credit rating, unlike Japanese issuers, which tend to issue 30-year non-call 10 subordinated bonds to earn partial equity credit with rating agencies.
The alternative 15-year non-call 10 Tier 2 format has been popular with banks in countries like Australia and Thailand, but the tenor is less appealing for US investors.
The bumper order book allowed AIA to price the subordinated bond only 25bp wide of its senior curve, compared with a 35bp–40bp premium seen at the time for insurers in the US, Europe and Australia.
Real-money managers, including state funds and insurance companies, bought almost a third of the 144A/Reg S deal, which was allocated to a diverse geographical group of investors. The US took 52%, Asia 34% and EMEA 14%.
HSBC, Morgan Stanley, Standard Chartered and Wells Fargo were joint active bookrunners.
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