Having been a pioneer in new forms of bank capital, Credit Suisse is aiming to be similarly innovative in insurance. US experience and the demands of the Swiss markets regulator made it match-fit for a recent $800m deal, writes Edward Russell-Walling. 

Credit Suisse team of the month embedded

Regulatory capital has spawned more than its fair share of bond market innovations in recent years. Until now, the focus has been mainly on bank capital, but attention is shifting to the insurance sector. The team at Credit Suisse has been a leading light throughout.

A recent deal for Swiss Re, in which the bank was a joint bookrunner, suggests a future direction. In the latest of three similar transactions, the reinsurer raised $800m in pre-funded capital, which will only become regulatory capital if and when it is needed.

A changing market

Europe’s insurance capital landscape has been changing, particularly since the EU’s Solvency II regime came into effect at the start of this year. This is 'Basel for insurers', setting minimum capital and solvency requirements, though it has not yet driven new issuance on the same scale as in the banking sector.

Alongside pre-funded capital, new products in the pipeline for insurers include ‘restricted tier one’ loss-absorbing bonds, though the first of these has yet to be issued. That is partly because insurers are enjoying generous grandfathering treatment of instruments issued under the previous regime. Marcus Schulte, Credit Suisse’s head of financial institutions group (FIG) debt capital markets (DCM), acknowledges that there has been considerably less new capital issuance from insurers than from banks. “But we expect it to grow over time,” he says.

Credit Suisse has been an active player in the evolution of new forms of bank capital and clearly intends to play a similar role for insurers. Back in January 2011, it was a joint manager on the debut of trigger-based hybrid capital bonds. Rabobank issued $2bn-worth of hybrid contingent capital bonds only days after the Basel Committee on Banking Supervision said that future hybrids must force investors to take losses in a crisis. The high-yielding bonds are designed to be written down if a capital ratio trigger is breached.

Shortly thereafter, Credit Suisse itself issued a $2bn contingent convertible Tier 2, alongside a private exchange of SFr6.1bn ($6.21bn) in contingent convertible Tier 1, all of which converts into equity if the bank’s Tier 1 capital ratio falls below 7%. “This was the first Basel III additional Tier 1 [AT1]-compliant issue anywhere,” says Samir Dhanani, Credit Suisse’s head of capital structuring for Europe, the Middle East and Africa.

More recently, the bank led BBVA’s €1bn AT1 deal, which reopened the bank hybrid market to southern European issuers after the first quarter’s turmoil. This issue set a new standard by achieving a coupon lower than the yield-to-call date of BBVA’s existing AT1 bonds. Credit Suisse was joint lead and bookrunner on a S$750m ($556.75m) transaction from Singapore’s United Overseas Bank, which opened the way for a flurry of Singapore dollar bank capital issuance. It was also on a US Bank $1bn Tier 2 issue with the tightest Tier 2 benchmark pricing of the year.

A bank of many talents

Credit Suisse has been practising what it preaches. “The bank is an issuer, as well as an adviser and provider of capital,” says Christopher Tuffey, Credit Suisse’s head of debt syndicate for Europe, the Middle East and Africa. “As an issuer, it is putting into practice what it is telling its clients.”

Switzerland’s financial markets regulator is one of the world’s most demanding, and the team has led Credit Suisse’s own capital-raising programme, including compliance with total loss-absorbing capital requirements. Including self-led transactions, the bank heads the bank capital league table for transactions since 2010 (up to the second quarter of 2016), with a deal value of €22.5bn, according to Bloomberg, followed by Deutsche Bank with €21.3bn and HSBC with €19.9bn.

So when it came to the Swiss Re transactions, Credit Suisse had a certain amount of experience to draw on. However, the pre-funding structure had its origins not in Europe but in the US. In 2013, Credit Suisse Securities (USA) was sole structuring adviser in a $1.5bn offering of ‘pre-capitalised trust securities’, or P-Caps, for US-based financial services group Prudential Financial, via a vehicle called Five Corners Funding Trust.

The trust invested the proceeds of the sale in a portfolio of US Treasury strips. At the same time it agreed a put option allowing Prudential to issue senior unsecured bonds to the trust from time to time in exchange for an equal amount of Treasuries. The idea was to give Prudential a source of liquidity at any time, even after a stress event, while giving P-Caps investors a risk profile equivalent to Prudential senior debt.

Swiss Re's first

Swiss Re was the first insurer to use this pre-funded structure for a public issue in Europe. “Together with Swiss Re, we took the technology that our US team had developed for Prudential, and adapted it to pre-fund capital rather than liquidity,” says director Julius Kirchner, a FIG DCM banker covering the German-speaking world. “It is a highly capitalised institution and was looking at how it could further optimise its capital structure and introduce further flexibility by having capital on tap.”

It also wanted to introduce a layer of capital at holding company level. Since 2011, it has had three business units – Swiss Reinsurance, Swiss Re Corporate Solutions and Swiss Re Life Capital – with listed holding company Swiss Re Limited (SRL) above them. Issuance has come out of each business unit, but not SRL. In November 2015, SRL issued its first transaction, a $700m 35-year non-call 10 pre-funded subordinated deal with a 5.75% coupon. There is no step-up but if the bonds are not called after 10 years the fixed rate becomes a floating rate.

As in the Prudential model, the proceeds from an insurance capital-eligible bond are initially invested in US Treasury instruments, via a vehicle called Demeter Investments. Swiss Re has the anytime option to bring the insurance capital onto its balance sheet when accessing these Treasuries in exchange for bonds. The structure allows on-demand access to debt capital at the SRL level, for use throughout the group, regardless of market conditions and at a fixed cost. Paul Bajer, a director in credit and liquidity solutions, fixed income, describes it as being like a revolving credit facility.

“You have access to liquidity on tap, available in the future, at a price that is known to you today,” he says. “The structure allows the capital markets to be used to create the facility.”

Private route

In March this year, Credit Suisse arranged a similar pre-funding issue for Swiss Re, also using Demeter but this time via private placement: $400m in 40-year non-call 15 loan notes with a 6.05% coupon. Two months later, the reinsurer was back in the public market with its third US dollar pre-funding deal, arranged by Credit Suisse, which was also co-manager alongside Bank of America Merrill Lynch, BNP Paribas, HSBC and Standard Chartered.

They decided on an (almost) intraday process. “A roadshow wasn’t necessary as the structure had been done earlier,” says Piers Ronan, Credit Suisse’s head of FIG debt syndicate. “But we did announce it the day before, [in the afternoon] London time, to give investors time to ask any questions.”

The managers particularly wanted to be in the market when Asia was awake, as they knew the deal would be attractive to Asian private banking customers, who buy a lot of US dollar products. “Swiss Re has a big presence in Asia and our own private bank investors made up a significant proportion of demand,” says Mr Ronan.

The 36-year non-call 11 deal, which was not priced until the US market opened, went out with 'high 5%' area price thoughts. Demand justified a final pricing of 5.625% and, on the back of a $5.25bn order book, the size was set at $800m. As anticipated, Asia (which took 43% of the deal) and private banks (with banks, nearly 33%) lined up to buy. The momentum created was such that Asian private banks were the prime customers for a $1bn perpetual non-call five-year vanilla Tier 2 deal launched days later by UK insurer Prudential plc, with a fixed-for-life coupon of 5.25%. Here too, Credit Suisse was joint bookrunner.

Mr Dhanani points out that the prefunding structure is now very relevant because it could have much broader application. “It is not limited to insurance companies,” he says. “A lot of companies that need revolving credit are now able to package it up in long-term credit form from the capital markets. It will add to the push towards greater use of credit markets in Europe.”


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