Almost two weeks ago we wrote about the rumoured contingent convertible bond issuance which Swiss Re would be sponsoring as a way to protect its balance sheet against declines in its capitalisation. Contingent capital used in this way can provide broad protection against many risks which could impact a reinsurer like Swiss Re, from large natural catastrophe events to financial market instability. Now some more details have emerged in the press on this issuance.
According to a report from Dow Jones news wires Swiss Re is seeking to issue an 11.5-year benchmark-sized contingent capital U.S. dollar bond which will yield around 6% to 7%. The transaction will use a trigger derived from the ratio of Swiss Re’s balance sheet compared to its liabilities. If Swiss Re’s capital falls to less than 125% of the value of its liabilities then investors in the contingent bonds would lose their principal.
We’re not sure of the details of how this converts to equity at this time, or if it even does, but the cover this contingent capital deal will provide should give Swiss Re a very broad layer of protection for its balance sheet. It will act almost like a source of retrocessional reinsurance protection covering the reinsurer for every line of business risk it assumes and also for major financial shocks which could be caused by other means.
It’s possible that Swiss Re also has one eye on regulatory issues regarding capital adequacy and by getting a layer of protection for its solvency in place now it might free up capital to be used elsewhere as and when new rules such as Solvency II come into play.
According to Dow Jones the bond is callable after 6.5 years after which the coupon on the bond resets to the initial spread over the prevailing five-year dollar mid-swap rate. The deal is being marketed by a number of banks, Bank of America Merrill Lynch, BNP Paribas, Credit Suisse, HSBC and Royal Bank of Scotland, and is not being marketed to U.S. investors.
Interestingly we believe this deal may have completed today as a stabilisation notice has been published on the London stock exchange by BNP Paribas for a bond issuance involving Swiss Re via an issuer called Aquarius + Investments Plc. The stabilisation period, where managers of a bond issuance can for a set period stabilise pricing of a bond when it begins secondary trading, is set to run from today the 5th March until the 11th March. The notes undergoing stabilisation have a term until September 2024 which ties in with the information Dow Jones published on the 11.5 year deal term. Also the stabilising managers are the exact same list of banks bookrunning the Swiss Re contingent capital deal.
We also understand that as much as $3.5 billion of these contingent notes may have been ordered by investors, but selling the deal hasn’t been plain sailing as some investors found the concept of a total writedown CoCo bond difficult to stomach when they do not fully understand the risks it is exposed to through Swiss Re’s business. The actual size of the issuance is believed to be closer to $750m though.
That’s all the information we have at this time on the transaction. We can’t confirm the stabilisation notice is definitely for the contingent capital bond, but given the banks involved, the term and the fact it names Swiss Re it’s highly possible that it is. We’ll bring you more details if a press release is forthcoming from Swiss Re.
Read our other articles on contingent capital from the last two weeks: