When Aviva decided to raise capital in late 2016, lead managers Société Générale, Morgan Stanley and RBS counselled against a sterling issuance. Treasurer Simon Rich tells Joanne Hart why the UK insurer is happy it followed their advice.
Leading UK insurer Aviva is no stranger to the bond markets. Typically, however, its transactions are issued to refinance existing bonds as they approach maturity. But in mid-2016, the group began to consider raising debt for other reasons.
“We started to think about what the world looked like then and what it might look like in future. So we asked ourselves two basic questions: is money cheap and is it going to become more expensive? And we came to the view that money was cheap and there were headwinds about that tilted to the negative,” says Aviva treasurer Simon Rich.
Keeping it liquid
Having come to this conclusion, Aviva decided to raise some capital and keep it fairly liquid, akin to 'rainy-day money'.
“We didn’t actually need it for anything specific but we thought it would give us extra flexibility. And because there was no actual need, we felt we could take a bit more risk with it – invest it in corporate bonds, for example, rather than money markets or Treasuries. That would just about cover the cost of carry,” says Mr Rich.
The company was keen to come to the market in October and the treasury team’s first thought was to issue in sterling, particularly as it had completed a short-dated euro-denominated refinancing early in September.
“We wanted to raise £500m [€576.7m]. That would give us sufficient funds to invest in something particular if the opportunity arose, provide some extra liquidity or just pay off debt if need be. We have a $650m transaction reaching its first call date next year and we knew that £500m could repay that if market conditions really turned,” says Mr Rich.
Why euros?
But Aviva’s lead managers, Société Générale, Morgan Stanley and RBS, advised against sterling issuance for several reasons.
“Our banks said that we could do £500m but it would be tough. The sterling market is much smaller than the euro market, Brexit was affecting sentiment and the [UK political] party conference season was creating further uncertainty. But the euro market was a completely different story. It’s always been a much larger and more liquid market and the European Central Bank’s [ECB’s] quantitative easing programme has created unprecedented demand for corporate issuance,” says Mr Rich.
Aviva then had to think about the right maturity to come in. “We looked at a range of tenors. We felt somewhere between five and 10 years would give us the flexibility that we needed and when we looked at our maturity stack, a seven-year term seemed the best option,” says Mr Rich.
The bank was planning to tap the market on October 19. But early that morning, the banking team informed Mr Rich that Citi had just issued a sizeable, euro-denominated transaction with a seven-year tenor.
“On the one hand, it was good because it endorsed our thinking but they were coming with a several-billion euro deal and we wanted €500m. I didn’t want to fight in the market against Citi,” says Mr Rich.
Good pointer on pricing
The transaction gave Aviva a helpful reference point in terms of pricing, however, and first thing the following morning, the insurer announced a €500m ‘no grow’ transaction with a seven-year maturity and initial price talk of about 80 basis points (bps) over mid-swaps.
“Any treasurer who tells you they aren’t nervous when they launch a bond is not telling the truth,” says Mr Rich. “There is always the worry some big macro event will come up and the deal will fail, but we watched the book build on the screens and it took a matter of minutes to get to €500m. We got to €1bn soon after and the book continued to grow to €2.4bn.”
At that stage, the indicative price was cut to mid-swaps plus 60bps to 65bps. Demand persisted, the book grew to more than €2.4bn and there were orders from more than 210 accounts. The spread was ultimately set at 60bps over mid-swaps with a coupon of 0.625%.
“If I had come in the sterling market, the cost would have been about 2% for a similar tenor but of course, if I took sterling and invested it conservatively, I would get about 25bps in coupon payments, whereas if I did the same in euros, I would pay 40bps. Even so, net net, it worked out about half a percentage point cheaper for us in euros,” says Mr Rich.
Attracting euro investors
The pricing was also very appealing to investors, however. “As a UK plc, we are not eligible for the ECB bond-buying programme and at the moment, because the ECB is buying up virtually all the bonds that are eligible, [and] issuers are pricing incredibly tightly. We are routinely told that we could come 15bps to 20bps cheaper if we were domiciled in the eurozone. So for EU investors, that makes our paper highly attractive,” says Mr Rich.
Aviva’s timing was also propitious. Pricing did not reduce in the weeks after the transaction and, as the year draws to a close, the political and economic environment remains highly uncertain.
“We are happy that we got the money. We’re happy with the pricing. We’re happy with the flexibility and we are happy with the advice that we got from our banks,” says Mr Rich. “We pushed quite hard for sterling and they said it was not the right decision so we talked about it for 48 hours or so, they explained their reasons and we listened to them. They were absolutely right. And we appreciated their guidance.”
