Reuters: Bankruptcy News: Aviva sub plans on track despite wider CDS

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Aviva sub plans on track despite wider CDS Apr 23rd 2012, 10:54 By Jean-Marc Poilpre Mon Apr 23, 2012 6:54am EDT LONDON, April 23 (IFR) - The UK's largest insurance company Aviva is still planning to sell a deeply subordinated bond deal despite the recent widening in the company's CDS and concerns over the group's deleveraging plans. The borrower met with investors in Hong Kong and Singapore last week with a view to launching a new hybrid Tier 1 issue. Barclays, Citigroup, Goldman Sachs, HSBC and JP Morgan are handling the trade. "We are monitoring market conditions, especially in Asia where distribution is targeted," a banker close to the deal said, adding that the transaction was never intended to be completed last week. While the widening of Aviva's senior CDS has been in line with the market, its subordinated CDS has underperformed. According to Markit, the insurer's subordinated five-year cost of protection was quoted at 296.5bp on Monday morning, up from 227bp at the beginning of the month. A banker close to the deal downplayed the significance of the widening, however, pointing to the low liquidity of CDS on insurance companies. A report in the Sunday Times yesterday said the sale by Aviva of its American life assurance business would only fetch around GBP1bn, half of what Aviva paid for it six years ago. Bankers said potential European buyers could be put off bidding because of the new Solvency II rules. SG credit analyst Rotger Franz said in a note on Friday that increased uncertainty from the eurozone crisis has prompted the strong widening of Aviva euro paper, and that he is concerned over what he calls "Aviva's increased flexibility to reach its deleveraging target." He argued that a potential new Tier 1 issue could "revive investor concern about Aviva's leverage", noting that Aviva has said it could extend the timeframe for its target considering the growing uncertainty from the eurozone crisis over the past few weeks. "In our view, a new issue would jeopardize the issuer's target to reduce leverage by GBP700m between 2011 and 2013," he argued. The announcement of plans to deleverage had initially sparked a significant rally on Aviva paper a year ago, Franz recalled, which could now at least partially reverse. He changed his outright recommendations for Aviva perps in euros from "Buy" to "Hold" and for the Aviva 6.875% 38-18 Lower Tier 2 from "Hold" to "Sell". He also recommended selling Aviva sub debt in sterling for valuation reasons. Aviva is eyeing an old-style insurance Tier 1 trade, similar to Prudential's perpetual non-call 5.5-year issue sold by Prudential in January last year. The Aviva bonds can convert into preference shares at any time. If converted, the terms would essentially be the same, except that the preference shares are non-cumulative. There is also a mandatory conversion at year 99, to help ensure that the deal remains tax-deductible. Link this Share this Digg this Email Reprints

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