Photo of Hana Harrison, Assistant Treasurer & Head of Funding.
Hana Harrison
Assistant Treasurer & Head of Funding
Phoenix Group is the UK’s largest long-term savings and retirement business with c.14 million customers and £338bn of assets under administration across both its Heritage and Open businesses.
Deciding to buy biggest competitor in troubled times reaps rewards
The challenge
Buying its biggest competitor* during the outbreak of the global pandemic was truly remarkable. At the time where the regulator recommended to the insurance sector in the UK to think about postponing dividends, Phoenix treasury team was not only dealing with the crisis and business as usual but also structuring innovative deals to enable the funding of a major transformational deal.
(*In December 2019, Phoenix announced the acquisition of ReAssure – its biggest competitor – from Swiss Re and MS&AD for consideration of £3.2bn, representing 0.91x ReAssure’s pro-forma UT1 Own Funds.)
The solution
The transaction was efficiently structured through cash consideration of £1.2bn, funded through a combination of debt and own cash resources, plus the issue of shares with a value of £2bn to Swiss Re and (ultimately) MS&AD, resulting in a combined strategic shareholding of 28% in the enlarged group. A financing of the debt element was then nimbly delivered in 1H 2020, across extremely successful transactions in a variety of formats and currencies. This was managed through the outbreak of the global pandemic, navigating through market volatility.
Phoenix completed its acquisition of the ReAssure Group from Swiss Re and MS&AD in July 2020.
Citi, HSBC and Bank of America acted in a M&A advisory capacity and the US$750m transaction was led by HSBC, Citi, Bank of America, J.P. Morgan and Natixis as joint bookrunners. NatWest Markets was the sole bookrunner for the £500m transaction.
Best practice and innovation
The combination of the two businesses is expected to generate impressive synergies of c£800m by leveraging Phoenix’s highly efficient operating model and best in class approach to capital management, creating significant value for all parties involved, as well as society at large, as freed-up regulatory capital will be channelled back into the real economy.
The treasury team organised an innovative 12-month, £1.2bn standby hybrid capital backstop facility with its partner banks on extremely favourable terms. This provided Phoenix with the certainty of funds and ensured adequate liquidity until transaction close. The deal involved global cooperation across multiple parties, as ReAssure was 75% owned by Swiss Re, headquartered in Switzerland, and 25% by MS&AD, headquartered in Tokyo.
US$750m Fixed Rate Reset Perpetual Restricted Tier 1 Contingent Convertible Notes (“RT1 Notes”) were the first debt raised to fund the acquisition and included an innovative structural feature requiring approvals from PRA and HMRC. Phoenix’s treasury team worked extensively with advisors to develop an enhanced Principal Loss-Absorption Mechanism, in response to changes to tax and regulatory rules.
In April Phoenix re-opened the European subordinated bond market with £500m Tier 2 issue. Market was closed prior to that for two months due to COVID-19, however Phoenix managed to issue highly successful £500m 5.625% 11yr Tier 2 transaction to complete the financing of the ReAssure acquisition.
The strength of execution of the RT1 and T2 bonds were reflection of comprehensive fixed income investor relations work that Phoenix treasury had completed over the previous two years.
One of the key aspects of the acquisition funding was to ensure that the £1bn of Tier 2 and Tier 3 Notes issued by ReAssure (the “ReAssure Notes”) would be fully eligible and available as Tier 2 and Tier 3 capital of the enlarged group following completion of the acquisition.
The Phoenix treasury team successfully achieved this by obtaining the consent of the trustee of the ReAssure Notes to substitute Phoenix in place of ReAssure as the issuer of the ReAssure Notes (the ‘Issuer Substitution’).
Phoenix treasury also assessed the impact of the transaction on the overall credit profile of the company and worked closely with Fitch Ratings in order to assure that the key metrics are not compromised.
Key benefits
- Acquisition is one of the largest ever in the closed life insurance market and confirmed Phoenix’s position as Europe’s largest life consolidator.
- Created an enlarged group with £329bn of assets under administration – an increase of 34%.
- Brings greater scale and alignment with Phoenix’s existing product mix.
- Strengthens Phoenix’s capacity to generate shareholder value.
- The ReAssure business was initially expected to create net synergies of c£800m split between capital and cost synergies. This was revised more recently by 30% to an incredible £1.050bn.
- Phoenix’s entire bond curve tightened off the back of the execution of the US$750m RT1 Notes as investors reassessed fair value in light of the exceptional subscription for the new transaction and the positive impact of the ReAssure acquisition on Phoenix’s credit story.
- Fitch Revised Phoenix’s Outlook to Positive on ReAssure Deal. The revision of the Outlook reflected Fitch’s expectation that the planned acquisition would strengthen Phoenix’s already strong business profile through increased size, scale and business position.
- “To announce a transaction the size and complexity of ReAssure and receive an ‘upgrade’ is unprecedented and a true testimony of the innovative structure and hard work of everyone involved,” says Hana Harrison, Assistant Treasurer & Head of Funding.
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