German insurer Talanx closed its longest ever bond issue in a very narrow window of opportunity as market volatility intensified in July. Joanne Hart reports.

German insurance group Talanx is a leading player in its sector and has grown rapidly over the past 15 years, both organically and by acquisition. But the group was a relative stranger to the capital markets until 2012, when it changed its approach, launching a €500m subordinated bond early in the year and floating on the Frankfurt stock exchange six months later.

Talanx returned to the market with a €750m 10-year senior bond in 2013, and earlier this year the group began to think about another senior transaction.

Back to the market

“We have some callable bonds coming up, mainly from companies that we have acquired," says Talanx head of treasury Alik Hertel. "With rates close to historic lows, it seemed like a good time to reduce credit lines and pre-finance a possible early redemption of these bonds.”

Talanx has a network of nine banks, from which it chose four for its 2014 transaction: Barclays, Citi, HSBC and Natixis. “We work closely with a group of banks, which provide their balance sheet to us in terms of loan facilities. In May and June, we held a short selection process and then we chose our bookrunners,” says Mr Hertel.

The group was keen to tap the long end of the market to capture current low rates, and initiated a debate with its banks over a 12-year or 15-year term. “We wanted to issue a transaction that was plain vanilla but that was also as long as possible," says Mr Hertel. "Looking for the simplest solution and the longest tenure, it was clear that 12 years was the sweet spot.”

Once the bookrunners had been chosen, Talanx was keen to move fast. “When we started thinking about a deal, we considered launching before the summer – in early July – or waiting until September. In the end, we went for the first option. We just saw no reason to wait,” says Talanx head of investor relations Carsten Werle.

The decision gave Talanx and its bookrunners little more than three weeks to launch its transaction. Fortunately, since launching its subordinated bond in 2012, the group had maintained regular contact with investors so they knew the company well and were familiar with its financial profile.

Trouble looms

Nonetheless, the process was not straightforward. Whereas markets were relatively calm in the early part of the year, they became increasingly choppy as the summer approached.

In early July, investors were spooked when troubles surfaced at Portuguese bank Banco Espirito Santo. Coupled with broader concerns about economic recovery, the Portuguese crisis reignited fears about the European financial sector, forcing down bond prices across the board.

Talanx, however, was keen to stick to its timetable. As a reputable insurer which had devoted time and effort to investor relations, the company was advised that it could launch a transaction without a roadshow, provided it stuck to a 12-year term.

“Over the past two-and-a-half years, we have established our basic capital markets footprint because we are present in three major segments – subordinated debt, senior debt and equities – with reference prices in each area,” says Mr Hertel.

Mr Werle adds: “We are in continuous dialogue with investors so we did not feel we needed to do a deal-related roadshow. We just wanted to do what was necessary to make our deal a success.” 

Go for launch

Forgoing a roadshow allowed the transaction to proceed at a pace. The group identified a few days in mid-July when it seemed a transaction would work and, on July 16, Talanx was advised to launch. “The days before were rather choppy, but on that particular day the market seemed more approachable,” says Mr Hertel.

The company and its bankers waited until 9.45am Central European time, by which time it was clear that market sentiment was supportive. The group then announced its deal and held a global investor call just over an hour later.

Recent deals from other issuers had been criticised after increasing substantially during the book-building process. With this in mind, Talanx said from the start that its transaction would be no larger than €500m.

Initial price thoughts of mid-swaps plus 105 basis points were released at noon, and by 13.30 the book had grown to more than €1.9bn. The spread was tightened but orders continued to flood in. At 14.20, final pricing was announced at 97 basis points over mid-swaps, with a coupon of 2.5% and reoffer price of 99.143 cents per euro.

When the book closed, more than €2.5bn of orders had been submitted from about 150 accounts. “We were very pleased with the transaction. The vast majority was taken by high-calibre long-only investors, asset managers, private banks, pension funds and insurers,” says Mr Werle.

Talanx was particularly fortunate with its timing, as the very next day the Malaysian aeroplane tragedy in Ukraine unfolded and markets suffered a further bout of the jitters. Nonetheless, the Talanx bond held steady and continued to tighten in subsequent weeks. “We were lucky, of course. But our bond also shows the benefits of frequent contact with investors," says Mr Werle. "That is a key lesson we have learned."

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