Allianz brings RT1 market to life

Johan Eriksson / Achim Wiechert

Over the years, the concept of loss-absorbing capital has become synonymous with banks. Additional Tier 1 (AT1) bonds, which are written down or convert to equity if the issuing bank’s capital drops below a certain level, were a key part of Europe’s regulatory response to the global financial crisis. They have since grown into a $200bn market.

But banking is not the only sector required to hold loss-absorbing capital. The Solvency II directive requires European insurers to issue their own breed of convertible debt called restricted Tier 1 (RT1). Since the first issuance in 2017, the market has sputtered to life via 20 small deals out of the UK and northern Europe. Things changed on November 10 when Europe’s biggest insurer, Allianz, sold a €2.25bn-equivalent dual tranche deal which was five times oversubscribed.

Joint ambition

The RT1 market’s first benchmark deal was a long time in the making. Like AT1s, when they first appeared seven years ago, it was not clear if RT1s were considered equity or debt for German tax purposes. Until this was clarified by the Ministry of Finance, a German RT1 was all-but impossible. In October 2020 it was confirmed as debt — some six years after the German Insurance Association, alongside Allianz and others, had started drafting the tax terms and conditions required by the ministry to make its decision.

“We had anticipated that we would get this approval, as the ministry had come to the same conclusion regarding AT1 many years ago,” says Achim Wiechert, Allianz’s head of external funding. “So we were well prepared when the approval was granted.” Indeed, the firm had started preparing its RT1 debut in the first half of the year. Around the same time, it started exploring its first Rule 144A offering which would allow it to target the large pool of qualified institutional investors in the US.

“It probably wasn’t an obvious decision to combine the two, given their respective complexities, but in the early summer we became comfortable enough to decide it was worth trying,” says Johan Eriksson, head of group treasury and corporate finance. Initially, the team mooted doing the entire capital raise via Rule 144A, but to minimise risk and provide more flexibility it opted to split the deal into a euro tranche and a dollar tranche.

“We weren’t sure if doing our RT1 debut in the US might have meant paying a double premium, as it’s a new product and Allianz as a credit isn’t too familiar among US investors,” explains Mr Wiechert. “So we started to prepare a euro deal simultaneously.”

Institutional effort

Work started in earnest in June, when Allianz appointed its lead bank. “Typically we only involve banks shortly before launch. But because we weren’t familiar with US market conventions, and due to the complexity of the 144A product, we involved Citi as global coordinator from the start,” says Mr Wiechert. The other bookrunners — Bank of America, BNP Paribas, Deutsche Bank and HSBC — were brought in just 10 days before the first investor calls on November 9.

The dollar tranche launched early the following morning (to catch Asia investors) with initial price talk (IPT) of 4.25%. A few hours later the euro tranche followed with IPT of 3.25%. Both tightened by more than 60 basis points before $1.25bn of notes were allocated at 3.5% and €1.25bn at 2.625%. In total, orders were received from more than 1400 investors.

Allianz was confident the deal would be well received, but the reality exceeded those expectations. “We had seen significant demand for this kind of instrument from us for a long time in investor meetings and calls,” says Mr Eriksson. “We knew investors were waiting for something liquid from a well-known, relatively-frequent issuer to help the market establish itself. But still, the demand and ultimate pricing were obviously better than what we had expected.”

He describes the deal as a “major institutional effort” which involved multiple teams working together on novel structures. Its success is also attributable to Allianz’s blue-chip credit rating, the substantial buffer between its Solvency II ratio and the notes’ 100% write-down trigger, and US investors’ familiarity with loss-absorption thanks to the AT1 market. Pfizer and BioNTech’s November 9 announcement that its Covid-19 vaccine was more than 90% effective provided another boost. “That increased the froth of the market, but we would have expected a constructive response regardless,” says Mr Eriksson.

No avalanche

The breadth of investor interest, plus Allianz’s establishment of a reference rate, makes the deal a breakthrough for the RT1 market. But there are natural limits to its growth. For example, Allianz’s one-to-three significant bond sales a year make it one of the European insurance industry’s biggest issuers. Volumes will be boosted by the need to replace legacy instruments which lose capital eligibility in 2025, but Mr Eriksson cautions against expecting an avalanche of deals.  

“There are some large issuers that you can assume will have the need at some point to issue significant amounts of RT1. But our industry is smaller than that of banks, and insurers don’t issue as much as banks, so it won’t be comparable to AT1,” he notes. “The market will get bigger though, and our transaction will have helped in some way to achieve that.”