Generali feels squeeze as sub call deadline looms
LONDON, June 28 (IFR) - Investors holding a subordinated issue for Italian insurer Generali increasingly fear that the company will not be able to retire the bonds at the first opportunity, breaking with previous market practice.
Generali has a EUR750m July 2022 Lower Tier two coming up for call on 20 July. However, the only way it can replace the bond is to raise an instrument of similar or better quality.
"Generali has obtained the authorisation from the regulator to exercise the call on this deal, however, this is subject to Generali issuing an instrument of the same quality," said a Generali official. "The problem is right now is that the markets are closed and if you can't go to the market, it is very hard to call the bonds."
The Bank of Italy relaxed its rules in relation to bank capital instruments at the beginning of February, so banks were not forced to issue new capital before they called outstanding deals or bought them back via liability management exercises. However, the rule change did not extend to insurance companies.
Generali's management wants to call the bond and had bondholders interest at heart, the official said. In the past, strong banks that have not called subordinated issues at the first opportunity have been heavily criticised by bondholders who have in some cases threatened not to buy their debt again.
Generali intends to communicate its plans by July 5, which is 15 days before the call deadline.
Bankers agreed that a new issue for an Italian insurance company would be a huge stretch given the current market backdrop.
"For high profile issuers, the plan A is always to try to pre-finance and redeem the outstanding bond," said a DCM banker. "However, this becomes difficult when the markets are tough and sometimes, things are so difficult so you can't do a deal."
He said that Generali could look at alternatives such as a liability management exercise or an increase in the step-up terms. As it stands, the bond is due to step-up to six-month Euribor plus 200bp, which would equate to a coupon of around 3% - well below current valuations for subordinated debt insurance.
"Management is considering a lot of options to keep investors on side and Generali could increase the step-up," the Generali official said.
Such a move would echo what a number of Italian banks, including Banca Monte dei Paschi di Siena and UBI Banca, did in late 2010 and early 2011. This was before the Bank of Italy relaxed rules.
Generali's senior CDS was 10bp wider at 424bp on Thursday morning while the bond in question was quoted around 91/92, down from around 98 in mid-June and close to 99.5 in the middle of May.
Rotger Franz, an analyst at Societe Generale, believes that the likelihood of a call on the bond is low, albeit not zero, unless there is an unexpected market recovery over the next two weeks.
"A likely non-call would be a strong disappointment to investors given the high expectations raised by Generali on its commitment to call," he said.
On the back of it, he changed his recommendation on the 2022 Lower Tier 2 bond from Hold to Sell. He now has all Generali sub debt issues rated as Sell, with a negative credit opinion. (Reporting by Helene Durand, Additional reporting by Jean Marc Poilpre, Editing by Alex Chambers and Julian Baker)
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