TEXT-S&P rates Standard Life's proposed subordinated bonds 'BBB'
Nov 20 - Standard & Poor's Ratings Services said today that it had assigned its 'BBB' long-term issue rating to the proposed dated junior subordinated callable bonds of insurance holding company Standard Life PLC (A-/Stable/--). The bonds will be denominated in British pounds sterling. The rating is subject to our review of the final terms and conditions.
The rating incorporates our standard methodology for junior subordinated debt issues: We have rated the proposed bonds two notches below the long-term counterparty credit rating of the issuer, Standard Life PLC. This is the first issue by Standard Life PLC that is not guaranteed by the operating company, Standard Life Assurance Ltd. (A+/Stable/A-1).
The rating is based on our understanding that holders of the proposed bonds will be subordinated to Standard Life's senior creditors and that Standard Life has the option of deferring interest if, during the previous six-month period:
-- No dividend or other distribution was declared, and no interest was paid on any junior or equally ranking securities; or
-- No redemption, repayment, or repurchase of any parity or junior instruments was made.
Furthermore, we note that interest deferral is mandatory only if a solvency event, both under the current and the future Solvency II regime, has occurred.
We understand that the instruments have a tenor of 30 years, but will be callable 10 years after issuance and on any semiannual variable-interest payment date thereafter. Initially, Standard Life will pay a fixed coupon each year. If the bonds are not redeemed on the first call date, the coupon will be reset to the prevailing five-year pound sterling mid-swap rate, plus a margin (including a step-up of 100 basis points), and be payable semiannually. We therefore consider the incentive to call the proposed notes after 10 years to be moderate. Thereafter, the coupon will be reset periodically on the interest payment date falling on the fifth anniversary of the previous reset.
We expect to classify the bonds as having "intermediate equity content" under our hybrid capital criteria. We include securities of this nature, up to a maximum of 25%, in our calculation of total adjusted capital, which forms the basis of our consolidated risk-based capital analysis of insurance companies. Such inclusion is subject to the bonds being considered eligible for regulatory solvency treatment and the aggregate amount of included hybrid capital not exceeding the total eligible for regulatory solvency treatment. Our classification of the bonds in the "intermediate equity content" category may change if the final Solvency II implementation measures preclude eligibility of the bonds as regulatory capital.
We understand that Standard Life plans to use the proceeds from the bonds for general corporate purposes. We expect Standard Life's financial leverage and fixed-charge coverage ratios to remain well within tolerances that are consistent with our credit ratings on the company.
RELATED RESEARCH AND CRITERIA
-- Criteria Clarification On Hybrid Capital Step-Ups, Call Options, And Replacement Provisions, Oct. 22, 2012
-- Implications Of Solvency II Proposals For Our European Insurance Hybrid Criteria, March 4, 2010
-- Hybrid Capital Issue Features: Update On Dividend Stoppers, Look-Backs, And Pushers, Feb. 10, 2010
-- Assumptions: Clarification Of The Equity Content Categories Used For Bank And Insurance Hybrid Instruments With Restricted Ability To Defer Payments, Feb. 9, 2010
-- Financial Flexibility, April 22, 2009
-- Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008
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