Phoenix rises after three-year absence with record investor interest
Published: Sep 2024
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Highly Commended Winner
The Phoenix Group
Photo of Hana Harrison, The Phoenix Group and Charles Colliere, J.P. Morgan.
Hana Harrison
Deputy Group Treasurer
With over £280bn of assets under management, Phoenix Group is the UK’s largest long-term savings and retirement business. It offers around 12 million customers a range of products including pensions, savings and life insurance. Phoenix has grown through a series of mergers and acquisitions of long-established companies and in recent years acquired several major brands including Standard Life and SunLife.
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The challenge
Successfully raising money in the bond market involves a fine balance of timing, pricing, and carefully nurturing investor interest to minimise financing costs. When Phoenix decided to issue 30NC10 structure for the first time, the treasury team were juggling more than the usual spinning plates.
Phoenix wanted to set a pricing benchmark that would reposition the credit curve of the company and illustrated investor buy-in and enthusiasm for its strategic shift following a three-year absence from the bond market. To complicate things further, Phoenix wanted to future-proof the capital instruments for additional rating without incurring additional cost.
Phoenix is rated by Fitch only. The 30NC10 format is S&P and Moody’s friendly, but comes with premium versus bullet structure, which is sufficient for 100% capital recognition under Fitch. The 30NC10 format signalled a possibility of Phoenix obtaining additional ratings which was clearly credit positive and was used to price through the callable premium. By this approach Phoenix repriced the credit curve to much tighter level, benefitting future issuance pricing and effectively led to the repricing of the call premium for the benefit of the wider market.
The solution
As it was, the transaction gathered the largest orderbook for a UK insurance transaction since September 2021 with investors piling in for a slice of Phoenix’s growth story. The unusual 30bps spread move during execution reflecting investor demand, was the largest for a GBP insurance deal in recent years.
The strategic objectives for the transaction, were all achieved:
Refinancing and terming-out near-term subordinated debt to reinforce the permanence of Phoenix’s balance sheet.
Securing a successful re-entry into the bond market after three years of absence and the repositioning of the Phoenix credit as a diversified business focused on growth.
Achieving the tightest pricing possible to minimise the group’s finance costs going forward and serve as an efficient pricing benchmark for Phoenix’s upcoming refinancing exercises.
Ensuring leverage and capital neutrality through the matching of issued and repurchased amounts despite the inherent uncertainty re investor participation in the tender.
Future-proofing the new instrument for an additional rating by S&P and/or Moody’s in support of the corporate growth agenda and to align the Phoenix credit with the most sophisticated, best in class insurance issuers. The design of the transaction reflected the high conviction from the Phoenix treasury team around the relative price positioning of the Phoenix credit relative to its AA-rated peers and the limited pricing relevance of some of Phoenix’s previously issued instruments given their illiquidity.
Turning the normally negative perception around callable instruments (investor preference generally is for bullet maturities) into a positive signal to credit investors from issuing an S&P/Moody’s-eligible callable structure, highlighting Phoenix’s seriousness to seek further high-quality ratings in the future.
Emphasising the limited pricing premium that should be applied to the callable structure and strong willingness to avoid an inefficient price discovery process dictated by investors.
Investors’ support for Phoenix’s revised strategy and business model since its last visit to the bond market.
Best practice and innovation
The new instrument had some interesting features. For example, a 75% threshold for its “clean-up call” feature that allows the squeeze-out of minority bondholders. In another unusual feature – the first in the insurance space – the bond included an optional coupon deferral structure that means equity credit is automatically granted to the instrument if, and when, an S&P or Moody’s rating is obtained.
Elsewhere the bond gave Phoenix additional flexibility around managing the regulatory landscape. Under ‘Insurance Group Parent Entity Automatic Substitution’ the instrument can be substituted to a new parent entity to meet capital availability under Solvency II in the event of a corporate restructuring.
In order to maximise interest in the new issue from investors, tender acceptance codes were used, giving investors in the new issue priority in the take-up of their tender instructions. This is deemed to be the first use of such codes in a subordinated refinancing by a European financial institution, helping Phoenix minimise the risk of overfunding.
The transaction effectively led to the repricing of the call premium for the benefit of the wider market.
Key benefits
Cost savings.
Future-proof solution.
Exceptional implementation (budget/time).
Quality accreditation achieved.
Improved key performance indicator (KPI) metrics.
Charles Colliere
Executive Director, Insurance Debt Capital Markets, J.P. Morgan
Phoenix undertook an ambitious and highly innovative refinancing exercise, issuing a Tier 2 bond that could become eligible for equity credit from Moody’s or S&P in the future.
The Phoenix team transformed what should be a credit negative (the features making it a riskier instrument for investors) into a credit positive, bondholders appreciating Phoenix’s serious intentions to obtain a second rating in due course.
The fantastic result was evidenced by Phoenix obtaining the largest orderbook for any UK insurance bond deal in 2023 and effectively re-establishing pricing differentials within insurance Tier 2 instruments.
Congratulations from all of us at J.P. Morgan!
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