Hybrid capital – UK Club undertakes consent solicitation process
The first call date of the UK Club’s hybrid capital bond falls on the 22nd August 2013. Instead of calling the UK Club’s hybrid capital on that date, the UK Club is seeking consent to the amendment of some of its terms, including a revised coupon and extending the first-call date to August 2018. In order for these amendments to be binding on all noteholders at least 75% of the outstanding principal amount would have to vote in favour at the noteholders’ meeting on 7th June.
The UK Club launched its consent solicitation process with an “Indicative New Fixed Interest Rate” of 6.75% on 13th May. The UK Club considered this to be a good starting point to test current noteholders’ willingness to consent to the proposed amendments. UBS, the investment bank, who is managing the consent solicitation process on behalf of the UK Club, received feedback from noteholders that the 75% threshold would be achievable if the rate was set at 7.50% and the Club announced on 28 May that this would be the New Fixed Interest Rate.
It is customary in the capital markets to seek consent from noteholders rather than force a non-call on noteholders. A non-call would have resulted in a floating rate of 3 month US LIBOR plus 4.815 %. If the bond were not called it would initially float at 4.815% plus 0.3%, i.e. just over 5%. However, as a floating rate, this would not be guaranteed to remain at this rate. Setting the new coupon at 7.50 % provides fixed rate certainty for the Club.
The Club’s decision to raise the $100million hybrid capital in 2008 was in preparation for the introduction of EU Solvency 2 Directive in 2012. The Club’s hybrid capital counts for regulatory and rating agency purposes. Such bonds have been recognised as providing an efficient means for insurers of raising such capital.
Hybrid capital ‘Consent Solicitation’ FAQs
The Board of the UK Club has decided to seek the consent of the holders of its hybrid capital – (the noteholders) - to the amendment of certain terms and conditions of the hybrid capital, including the interest rate and the first-call date. The outcome of this process is expected to be announced on the 7th June 2013.
These FAQs are designed to answer questions Members and their brokers may have on the consent solicitation process.
What is a ‘consent solicitation’?
It is a structured process undertaken by UBS to seek the consent of the hybrid capital noteholders to the amendment of certain terms and conditions of the hybrid capital, including the interest rate and the First Call Date.
Why is the Club soliciting consent?
The Club is seeking to preserve the Tier 1 capital treatment provided by the hybrid capital in a pro-active and cost effective manner that maintains the value of the hybrid capital for the Club and that may provide a better investment proposition for hybrid capital noteholders in light of the approaching First Call Date on the 22nd August 2013.
What is the process?
All hybrid capital noteholders have been informed through their custodians of the proposed amendments and a meeting of noteholders will take place on the 7th June 2013.
If 75% of the outstanding principal amount vote in favour then the proposed amendments will become binding upon all hybrid capital noteholders whether present or not at the meeting.
When will the outcome of the consent solicitation be announced?
The Club will be in a position to inform the Members and their brokers of the outcome of the consent solicitation process and the conclusion of the noteholder meeting on the 7th June.
Why was the Indicative New Fixed Interest Rate set at 6.75%?
The Club considered this rate to be a good starting point to test to test current noteholders’ willingness to consent to the proposed amendments of the hybrid capital terms, including the interest rate and the first-call date.
Why was the New Fixed Interest Rate announced as 7.50%?
The feedback received from holders of the hybrid capital indicated that the 75% threshold would be achievable if the rate was set at 7.50% and the Club announced on the 28th May that this would be the New Fixed Interest Rate.
What is the next step?
Noteholders are currently asked to submit their proxies in advance of the noteholders’ meeting on the 7th June 2013, if they have not already done so.
UK Club Hybrid Capital – Background
In 2008 the Club Board anticipated that the scheduled introduction of the EU Solvency 2 Directive in 2012 would increase its solvency requirements.
It therefore decided to approve the first issue of hybrid capital by a mutual P&I club. Hybrid capital, or “perpetual subordinated capital securities”* is capital structured as debt but with many features in common with equity.
Initial terms of issue
In August 2008 the Club issued around $100 million of capital securities were listed at the London Stock Exchange as tradeable financial securities. The term of these capital securities is perpetual with the Club having the right to repay the issue from the fifth anniversary of issue.
These securities have a fixed coupon of 9% during those first five years. Under their current terms, after the fifth anniversary of issue that fixed interest rate becomes a floating rate with a pre-determined spread of 4.815% over 3 month US LIBOR.
Cost-effective solvency capital . . .
Despite the postponed introduction of the EU Solvency 2 Directive, the Board believes that this capital continues to provide a cost-effective way of meeting regulatory and rating agency requirements. It forms an additional safeguard against any future requirement to increase solvency capital.
. . .without diluting Members’ interests
Hybrid capital augments the Club’s solvency position without diluting Members’ interests. These capital securities are subordinated to all other creditors.
Many insurance companies have issued hybrid capital without diluting shareholders’ interests. Although the first issue of hybrid capital by a mutual P&I club, this form of capital is common in the wider insurance industry.
* The Club’s Report & Accounts since 2008 have identified the hybrid capital on its balance sheet under the description “Perpetual subordinated capital securities”. The coupon paid to noteholders is identified on the income statement as “Finance costs” and on the cashflow statement as “Interest paid on perpetual subordinated securities”.