Nippon Life debuts in Yankee market with $2bn hybrid


By Danielle Robinson and Andrea Johnson

NEW YORK, Oct 11 (IFR) - Nippon Life Insurance debuted inthe US dollar market on Thursday with a US$2bn hybrid bond, thefirst capital security it has issued in the Yankee market andone whose success could prompt other Japanese insurers to followsuit.

The A2/A minus rated 30 non-call 10-year fixed-to-floatingdeal, led by JP Morgan and Citigroup, attracted a whoppingUS$25bn-US$26bn of demand. That allowed it to ratchet in pricingby as much as 100 basis points (bp) from the 5.5% to low 6%range it was first whispered to just 5% for a spread of 327.8bpover Treasuries.

That kind of pricing and size makes it an attractivecomplement to the issue of 'kikin' bonds that Nippon and otherJapanese mutual insurance companies sell in the yen market asdeeply subordinated capital.

"These levels achieved by Nippon are obviously attractivefor them, so I think if any other issuers are interested intapping this market, they would look at the rate and think itmakes sense to lock in this level at this point in time," saidone banker in New York.

Kikins are notes backed by foundation, or kikin funds, andare similar to the so-called 'surplus notes' that US insurersissue as capital.

Like US surplus notes, kikin holders are last in line tomake a claim on an insurance company's assets in a defaultscenario, similar to where equity holders reside in a publiccompany.

US dollar hybrids would not replace the use of kikins, butare a welcome diversification of funding sources for theJapanese insurers, with the potential of getting bigger andbetter priced capital which has slightly less capital treatmentthan the kikins.

Although the hybrids are slightly senior to kikin bonds inthe capital structure, they get 'intermediate' equity creditfrom S&P and 25% equity treatment from Moody's. That would beslightly more equity credit than a Tier 2 instrument by a USbank, but not as equity-like as bank Tier 1 perpetualpreferreds.


The benefit of doing a hybrid is that they are a simpler andeasier story to sell to global investors than kikins, therebygiving an insurer like Nippon the ability to raise bigger andpotentially cheaper capital than doing a yen deal.

The Nippon hybrid converts to a floating rate at three-monthLIBOR plus 424.2bp if the deal is not called in the tenth year.

The structure also has two types of deferral features. Oneis a mandatory deferral of interest payments if insuranceregulators deem the company is unable to meet solvencyrequirements.

The company can also defer interest payments whenever itfeels necessary, which provides additional equity-likecharacteristics given that mandatory deferral would probablyonly kick in once the insurer no longer looks like a goingconcern.

Nippon was able to build such an enormous book by conductinga worldwide, multi-day roadshow and appealing to bothinstitutional accounts in the US and private banking clients aswell as institutional investors in Asia.

Excluding over-allocations, the book size was aroundUS$22bn. About 45% of the notes were sold to US investors,another 45% to Asian accounts and the remainder into Europe.

The Japanese insurer has taken advantage of an investor basethat's watching tens of billions of dollars of Trust PreferredSecurities disappearing from their portfolios as US banks redeemthem, now that those securities are slated to lose their Tier 1capital status beginning January 2013.

Comparables for the Nippon deal included Mitsui SumitomoInsurance Co's US$1.3bn 60 non-call 10-year at 7.00% in Marchthis year. That deal was trading at a dollar price of US$112.8bid to yield 5.40% before the Nippon deal announcement.

Another was Dai-Ichi Life Insurance, which issued a US$1.3bnperpetual non-call 10-year in March 2011, at a yield of 7.25%.That deal has a fixed-to-floating-rate structure with a 100bpstep-up if not called in 2021. It was trading at US$111.32 toyield 5.6% before the Nippon deal was announced.

Nippon's Single A minus trade priced close to where asimilar offering from a triple-B US domestic issuer would print.

Prudential Financial for instance issued a US$1bn 30non-call 10-year, rated Baa3/BBB+, with a 5.875% coupon at par.That deal is fixed until the call date, then floats atthree-month Libor plus 417.5bp.

On the day of the Nippon pricing, the Prudential bonds werequoted at US$105 at a yield-to-call of around 5.35%.

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(Reporting by Danielle Robinson and Andrea Johnson; Editing byCiara Linnane)

((danielle.robinson@thomsonreuters.com; Reuters messaging;danielle.robinson.thomsonreuters.com@reuters.net))