COMMENT: Generali - what cost reputation?

Thu Jul 5, 2012 7:06am EDT

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LONDON, July 5 (IFR) - Maintaining a good reputation in the markets is paramount, now perhaps more than ever. But just how much does that reputation cost?

Well, the answer, it appears, is the best part of EUR54m per year if you're Italian insurer Generali.

That is the difference in interest payments between the 10.125% coupon on its new subordinated bond and the level at which the issue it was designed to replace would have reset had it not been called (200bp over six-month Euribor). Click on link for story on deal

Even if you compare it with the prevailing 6.90% coupon rather than a reset of 2.93% at current rates, that's still EUR24m. Not as onerous, but still onerous enough.

So, why did Generali choose to go down this route rather than deciding not to exercise the call option?

Issuers naturally feel the need to keep the buyer base sweet, a sentiment that is laudable indeed. But times have changed and even the most recalcitrant investor must have noticed that.

When Deutsche Bank opted not to call a Lower Tier 2 issue in December 2008, it sent shockwaves reverberating across the market. Talk was that some investors had vowed never to buy Deutsche paper again and there were even rumours of a possible moratorium of dealing with bank at all.

But time moves on and it hardly looks as if Deutsche was shut out in the cold in any case.

There are undoubtedly arguments for calling paper that cannot be quantified purely in monetary terms, from bondholder mollification to peer group pressure, as fellow insurers fear what might happen to industry spreads were one of their number to break ranks.

As far as Generali is concerned, there is also the small matter of a new CEO being installed in August, the previous one having been ousted by the board of directors in June.

As a company, it is heavily reliant on bond investors and it has a wall of maturities coming up in 2014 that will need refinancing. Playing the long game is therefore perhaps understandable, but no-one would doubt it comes at quite a price.

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