Sterling High Grade Financial: RSA Insurance Group

Issuer: RSA Insurance Group
Issue date: May 12, 2009
Size: €500 million
Ratings: Baa1/BBB+ (Moody’s, S&P)
Maturity: May 20, 2039 (first call-date, May 20, 2019)
Coupon: 9.375% (565bp over UKT)

Bookrunners: BNP Paribas, Deutsche Bank, RBS

The financial crisis revealed that many seemingly well-capitalised institutions were anything but when the market came under extreme stress. As a consequence, subordinated debt, a major constituent of the capital base for financial institutions, has come under the microscope.

With the Basel Committee on Banking Supervision and the European Commission proposing major changes to what constitutes tier 1 and tier 2 capital, it was not surprising no new subordinated deals were sold in late 2008 and early 2009. The Lehman Brothers collapse was undoubtedly one reason, as was the decision by Deutsche Bank not to call its own lower tier debt issue when it had the option to do so last October.

So it is no exaggeration to say these were not optimum conditions for UK insurer RSA Group to try and refinance €500 million of lower tier 2 debt callable in October 2009, which it had been hoping to do since the middle of 2008.

“We looked at all the options, ranging from the transaction that finally got done to other liability management solutions. But it has to be remembered that the end of February 2009 was the darkest period for the hybrid sector,” says Jake Atcheson, a director in the financial institutions debt capital markets group at Royal Bank of Scotland.

On the road

Nevertheless, through February and March, positive sentiment seemed to be returning to the markets, with investors starting to meaningfully differentiate between credits. Keen to sell its own story, RSA embarked on a non-deal roadshow, meeting with 26 investors in London, Glasgow and Edinburgh, and it soon became apparent a deal would be possible.

“Most of the investors we talked to felt we could get senior funding. All were comfortable with the RSA credit and understood our objectives of delivering sustainable, profitable performance by avoiding volatility and taking little investment risk. We explained why we needed lower tier 2 funding and after a further sounding out of investors, we decided to press ahead,” says Steve Fenn, group treasurer at RSA Group.

To boldly go

While other institutions might have waited for another firm to reopen the market given the uncertainty surrounding subordinated debt, RSA’s philosophy was bolder. This was partly because it did not want to hang around for more bad news to filter through, but also because it felt other insurers were contemplating deals and, says Fenn, “did not want to have to follow higher interest rates from their deals”.

Rather than refinance in the euro market, RSA thought it might find a more positive response from sterling investors, particularly as they seemed more willing to accept a longer-dated issue. After discussions with investors it was decided to include a number of new structures. For example, after the first call-date (at 10 years), the coupon rebases to a rolling five-year back-end rate, rather than the more typical rebasing to three-month Libor. This feature was especially important to sterling investors with fixed-rated mandates and for others concerned at the potential for low Libor rates in future.

Investors were clearly comfortable with this feature and the credit, with the deal more than three times covered. Also, the pricing was revised from initial guidance of 575bp to 600bp over UK Treasuries to end up at 565bp.

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