April 4, 2012 / 3:50 PM / 8 years ago

Hartford answers critics with new bond issue

April 4 (IFR) - Still smarting from hedge-fund manager John Paulson’s criticism, The Hartford Financial Services Group this week managed to juggle the needs of both equity and bond investors by raising $2.15bn to pay back most of the crisis aid Allianz provided it in 2008.

Proceeds from the issue of the senior and subordinated bonds, along with $300m of cash on hand, will be used to pay the German insurer $2.43bn for the 10% 2068 hybrid bonds and 69.4m of warrants it bought to bolster Hartford through the financial crisis.

In addition to significantly reducing the company’s interest payments, the move squelches chatter that Allianz would either buy Hartford or sell off its stake.

“The transaction removes any future uncertainties tied to Allianz’s ownership position in Hartford,” said Fitch ratings agency. Allianz will have a 5% stake in Hartford once the hybrids and warrants are redeemed.

Hartford’s equity price rallied 4% on Monday on the news, while the new bonds tightened as much as 12bp after pricing.

The deal also served notice to Paulson - who blasted the company at its last earnings call for not enhancing shareholder value - that Hartford is in control of its destiny.

“This move signals that the Hartford management is committed to addressing their issues on their own, with their own strategy,” said Kathleen Shanley, senior bond analyst with Gimme Credit.

CORK STILL IN THE BOTTLE

All that said, it’s not a done deal yet.

Before it can repurchase any of the hybrids, Hartford must convince holders of its $408.77m 6.10% 2041 bonds to terminate their rights in certain replacement capital covenants (RCC) that were issued when the hybrids were sold to Allianz.

Drawn up to convince ratings agencies that the bonds were a permanent piece of Hartford’s capital equity, the RCCs stipulate that when the hybrids are redeemed, they must be replaced with securities that have the same or greater equity powers.

Hartford must also get holders of the 2041s, the most senior securities in the capital structure, to forgo their right to be paid off first and allow the company to pay off the hybrids now, without having to replace them with equal amounts of equity.

Hartford began soliciting consent for the termination of the RCCs last Friday, offering to pay one percentage point per $1,000 face value of bonds.

Of course the bondholders could band together and demand more than a one point payment. Other companies have had to pay as much as three to five points to cancel RCCs after activist bondholders grouped together.

So far there’s no sign of any group forming, but Hartford and its bankers will presumably be keeping the cork in the champagne bottle until Tuesday, April 10, when the consent solicitation closes at 5pm.

Nor does there seem to be much concern among investors or rating agencies, who are assuming the solicitation will go through without a hitch.

Taking out Allianz was seen as a necessary first step before embarking on an overhaul of its business strategy, which was outlined last week in answer to Paulson’s call for Hartford to spin off its lucrative property-casualty segment.

The plan includes exiting most of its life insurance businesses and refocusing on its higher-return operations.

But Paulson’s vocal criticisms ended up making Hartford pay up for the $2.15bn.

The company issued US$325m 4% 5.5-year senior bonds at 300bp, on top of initial whispers and about 28bp wider than calculated fair value.

Its US$800m 5.125% 10-year senior tranche was also priced at 300bp, tighter than guidance but with a 26bp new issue concession. The US$425m 6.625% 30-year came at 330bp, offering a pickup of 25bp.

Hartford also issued a US$600m 7.875% junior subordinated 30 non-call 10-year in the US$25 par retail market, of which about 80% was sold to institutional investors.

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