Phoenix Group Holdings is the largest closed life assurance company in the UK. Valued on the London Stock Exchange at more than £3bn ($3.7bn), the group can trace its roots back to 1782. Its present incarnation owes more to the past decade, however, when the closed life sector took shape in the UK and Phoenix emerged as a major player within it.
Today, Phoenix sees itself as an industry consolidator. Last year alone it made two sizeable acquisitions, AXA Wealth’s pension and protection businesses for £375m and Abbey Life for £935m.
Even as Phoenix expands, the group has been keen to reduce senior bank debt in favour of more capital market exposure. A seven-year senior bond was issued in 2014 and, the following year, a Tier 1 capital issue was exchanged for a 10-year Tier 2 capital, Solvency II-compliant deal.
French model
Towards the end of 2016, Phoenix began thinking of further capital market issuance, this time in the shape of a Tier 3 capital transaction.
“We had a reasonable amount of senior bank debt and we were looking for opportunities to move a proportion of it into hybrid capital,” says Alison Stevens, deputy group treasurer at Phoenix. “[Late in 2016], CNP Assurances, the French insurer, issued a Tier 3 deal in euros and, when we saw that it was well received by the market, we thought that kind of structure would work well for us too. Tier 2 has a minimum maturity of 10 years but Tier 3 has a minimum maturity of five years and that fitted our maturity profile better.”
Tier 3 also ranks senior to Tier 2 and has a slightly different structure. Mandatory coupon deferral kicks in on Tier 2 issuance if an insurer breaches its solvency capital requirements, but with Tier 3, coupon deferral is only triggered if a company breaches its minimum capital requirements. In other words, coupon deferral is much less likely.
Phoenix was keen to tap the sterling market, the first time an issuer had accessed Tier 3 capital in the UK currency. Although this was a debut transaction, the group took some comfort from talking to investors about the Abbey Life acquisition in late 2016.
“Various potential debt issuance opportunities were referenced during the meetings and there seemed to be positive signals about Tier 3,” says Ms Stevens.
Seize the day
On the basis of these encouraging signs and a confident mood to the market in early January, Phoenix Group decided to act. The insurer mandated five key relationship banks as bookrunners: Bank of America Merrill Lynch, Citibank, Lloyds Banking Group, JPMorgan and RBS.
“We work with them all very closely and they all have very good capability in European markets and sterling in particular,” says Ms Stevens.
Having appointed its lead managers, the company went on a two-day, deal-specific roadshow, comprising a series of meetings in London and several calls with international investors.
Investors were keen to know more about the Tier 3 structure, Phoenix’s rationale for choosing this type of bond and the group’s acquisition plans for the future. The company was able to demonstrate its strong cash-generation profile and, overall, the mood from investors confirmed Phoenix’s original sentiment: the market was ready for a sterling Tier 3 transaction.
“The preliminary feedback from investors in the autumn had been positive; we could see that the market was strong in January, and our bookrunners advised us that there was a good window for us to launch a transaction,” says Ms Stevens. “If the roadshow hadn’t gone well we would have held off, but it went very well so we were confident that it was the right time to come to market.”
Open and shut
That confidence proved well founded. On January 16, Phoenix released initial price guidance of 375 basis points (bps) over gilts for a £300m, five-and-a-half year bullet transaction, with no potential for upsizing.
Response was enthusiastic, the book was quickly oversubscribed and within a few hours the deal was done. It priced at 337.5bp over gilts, a considerable reduction from opening guidance.
“I think investors were attracted by the shorter maturity of five-and-a-half years rather than 10 years. Given interest rate sensitivities and potential inflation, the shorter duration seemed to appeal to them,” says Ms Stevens.
Investors included pension funds, insurers, private banks, hedge funds and even central banks. Notably, about 25% of the book comprised overseas institutions, principally from Europe.
“We were very pleased with the way the deal went and the book was very strong,” says Ms Stevens. “More than 80% of the investors in the transaction were new debt investors for Phoenix.”
