Allianz’s blockbuster RT1 underpinned by insurance fundamentals

Restricted Tier 1 (RT1) investors have been woken from an otherwise sleepy summer after Allianz Group, one of the largest insurers and asset managers globally, brought a $1.25bn deal to the market on Tuesday.

Allianz’s goal was to refinance an existing 3.5% coupon $1.25bn RT1 deal issued in November 2020. Initial price talk for the new deal, with an October 2033 call date and expected ratings of A3/A from Moody’s/S&P, was around 7.125%, which implied a premium of 290bp over US Treasuries (USTs).

The initial price talk was quickly revised down to 6.875% after the order book swelled to $8bn early in London trading hours, with the final coupon being set at 6.55% (a spread of 232bp over USTs) after demand grew to more than $12bn once US markets opened, meaning the transaction was nearly 10x covered. Despite the material tightening, demand has been sustained with the bonds trading around 50 cents above par in the secondary market at time of writing.

We think this transaction was interesting for several reasons.

First, this is the lowest reset RT1 issued in the last four years and only the second-lowest reset RT1 ever from a European insurer (that record is held by another Allianz transaction from September 2021). For investors less familiar with RT1 structures, if the issuer does not call the bonds at their first call date, the coupon resets at the prevailing underlying government bond at the time of the non-call (the five-year US Treasury in this case) plus the spread at issuance (232bp in this case). The level of demand for this deal is clearly a reflection of broader demand for credit risk, but we believe it also indicates the breadth of the buyer base and investors’ willingness to lock in the spread over a longer time horizon in light of the strong fundamentals of the European insurance industry.

Second, as we noted, the goal of the transaction was to replace an existing 3.5% coupon $1.25bn RT1. That bond was originally issued in November 2020 at 3.5%, or a spread of 297bp over USTs, so the new deal’s reset of 232bp is clearly economic for Allianz. However, it is worth highlighting that this particular bond has spent most of its “life” below par, trading with considerable extension risk and being perceived as having a “low-reset” (i.e. a deal it might be beneficial for an issuer not to call) yet right now it is about 60bp “in the money”. The point here is that the reset will always be seen in the context of where spreads are in the cycle, and periods of tighter achievable spreads in the primary market can provide ample opportunities for issuers to refinance existing transactions and reduce extension risk. This is important as when we go through periods of wider spreads, some investors are quick to price low-reset bonds to perpetuity, i.e. with the assumption they will never be called. This assumption has been proved wrong time and time again.

Finally, it is worth noting that this latest transaction takes total issuance of RT1s year-to-date to around €6.7bn, bringing the total outstanding to around €28bn. With several months still to go, this is shaping up to be the busiest year ever for RT1 issuance by some distance – until now the biggest year was 2021 with €5bn in total brought to the market.

All-in-all, we take comfort in the level of appetite investors are demonstrating for junior subordinated debt from European insurers. Again, while some of this appetite is likely driven by general demand for credit, for us the achieved spread also reflects the high ratings in the space and the general comfort of investors around fundamentals in the European insurance market.