A US$1.5bn perpetual bond issued by Allianz dropped by four points on Monday after it became clear that the borrower would not be calling the trade at the first opportunity, joining other financial issuers in putting refinancing costs ahead of market convention.
The 3.875% transaction priced in 2016 was quoted at 93.50 around midday on Monday, down from 97.50 at the open as the window for the issuer to announce that it would call the deal passed. The sharp move lower puzzled bankers, who said investors should not have been expecting anything different from the German insurer.
"There is a long, long track record of issuers making a call based on economics in the US dollar fixed-for-life market," a senior syndicate banker said. "This is not the first time this has happened. I'm quite amused, I can only infer from the price move that some people investing in the bond thought it was going to get called at the first call date, but I'm not sure why."
While banks skipping calls on subordinated debt placed with institutional investor is still a relatively new trend, borrowers leaving deals outstanding in the US dollar Reg S market typically dominated by private banks is not new.
"Those transactions typically never had the same call expectations as resettable trades did," a senior structuring DCM banker said. "I don't think there ever was the same stigma in leaving a fixed-for-life bond outstanding. There's a good reason that these trades were issued in that format, and there was never any implicit or explicit signal that the bonds would be redeemed."
Still, the price move seem to point to investors being caught off guard. The bond is now callable at any time and bankers expect that, once the dust settles, it will trade around par.
The deal was part of a small flurry of fixed-for-life trades printed in the second half of 2016, with issuers such as Allianz, Prudential, Zurich Re and AXA able to lock in very low coupons, helped by a rampant bid for yield. The book for Allianz reached around US$13bn, for example.
Since then, the market has all but been shut, however. "It's a very niche market, very episodic," the senior syndicate banker said.
Still, similar to other financial issuers that have opted to favour the economics of a call over market convention, bankers believe Allianz will retain market access from senior to deeply subordinated debt.
"I don't think it impacts their access or that there's a read-across to other issuers," another senior syndicate banker said. "If you think about Santander, Lloyds, Deutsche Bank, we have more and more cases of extension risk in the AT1 market, and when we've seen issuers skip calls, the market has acted in a grown-up nature. Having said that, I don't think you could sell a fixed-for-life instrument in the current market."