Nippon Life debuts in Yankee market with $2bn hybrid

By Danielle Robinson and Andrea Johnson

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

The A2/A minus rated 30 non-call 10-year fixed-to-floating deal, led by JP Morgan and Citigroup, attracted a whopping US$25bn-US$26bn of demand. That allowed it to ratchet in pricing by 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 327.8bp over Treasuries.

That kind of pricing and size makes it an attractive complement to the issue of 'kikin' bonds that Nippon and other Japanese mutual insurance companies sell in the yen market as deeply subordinated capital.

"These levels achieved by Nippon are obviously attractive for them, so I think if any other issuers are interested in tapping this market, they would look at the rate and think it makes sense to lock in this level at this point in time," said one banker in New York.

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

Like US surplus notes, kikin holders are last in line to make a claim on an insurance company's assets in a default scenario, similar to where equity holders reside in a public company.

US dollar hybrids would not replace the use of kikins, but are a welcome diversification of funding sources for the Japanese insurers, with the potential of getting bigger and better priced capital which has slightly less capital treatment than the kikins.

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


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

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

The structure also has two types of deferral features. One is a mandatory deferral of interest payments if insurance regulators deem the company is unable to meet solvency requirements.

The company can also defer interest payments whenever it feels necessary, which provides additional equity-like characteristics given that mandatory deferral would probably only kick in once the insurer no longer looks like a going concern.

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

Excluding over-allocations, the book size was around US$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 base that's watching tens of billions of dollars of Trust Preferred Securities disappearing from their portfolios as US banks redeem them, now that those securities are slated to lose their Tier 1 capital status beginning January 2013.

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

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

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

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

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

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

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