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Fuel for the M and A fire
The industry raised more capital in the first half of this year than it has in the first halves of the past two years. A big reason for this is the number of large mergers and acquisitions.
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As in the previous two years, most of the money came from issuing bonds. The industry raised $42.3bn from bonds in the first half of the year, and $27.7bn in the second quarter alone. Money from equity and equity-related deals was $12.3bn for the first half of the year and $8.8bn for the second quarter.
The second quarter of the year is typically a high point in the industry's capital raising calendar. It is the ideal window of opportunity between the natural lull of the first quarter and the time when most bankers and insurance executives take their summer holidays. This year there was even more activity than usual.
Market conditions are conducive to raising capital, particularly from bond issues. Interest rates are low, and spreads are still tight, although there has been some widening since May this year. "In terms of interest rate and spread levels, the conditions for issuing debt remain attractive for issuers, notwithstanding recent market volatility," says Rafael Villarreal, senior credit analyst at investment bank BNP Paribas.
But given that low interest rates have persisted for several years, this alone is not enough to explain the high level of capital raised this year.
A big reason for the large amount of debt and equity issuance in the first half and second quarter of this year is a number of large mergers and acquisitions, which have prompted the purchasing companies to tap investors for extra funds. Although the bulk of the money was raised through bonds, the biggest single capital raising in the second quarter was French insurer Axa's E4.1bn ($5.2bn) rights issue, launched to help finance the firm's E7.9bn acquisition of Swiss insurer Winterthur, announced on June 14. Axa issued 208.3m new shares in the transaction.
This was not the only capital raising Axa completed in the quarter in relation to the Winterthur buy. The firm also issued E2.2bn of deeply subordinated debt. This was issued in two tranches – one denominated in euros and the other in sterling.
The biggest bond issue of the second quarter was Generali's E1.2bn hybrid bond, launched to help finance its acquisition of fellow Italian insurer Toro.
Also present in the deals tables for this quarter are two parts of Swiss Re's capital raising effort to fund its $7.4bn acquisition of US reinsurance group GE Insurance Solutions. The Swiss firm raised almost $1.1bn from its combined rights issue and global share offering. With this deal, Swiss Re set a target of $1bn in proceeds and launched a rights issue to existing shareholders. It then launched the global offering to bring the amount raised up to the target. Sixty-nine percent of Swiss Re's shareholders subscribed to the rights issue, and the global offering was valued at $350m.
Not all of the activity on the second quarter was down to acquisitions. There is a strong showing from Bermudian firms in particular in the top 10 equity deals ranking. Start-up CastlePoint Re ranks the highest of the three Bermudians in the list. It raised $300m from a private offering to fund its establishment.
Second in the list is Montpelier Re. The company sold $50m of shares to WL Ross on June 1, and on the same date announced a $180m forward equity transaction, which is designed to give it access to extra capital if it needs it.
The third Bermudian firm in the list, Ram Holdings, is there because it floated on the Nasdaq stock exchange in on April 27. The launch price for its shares was $13. The company sold 9.4m shares – down from the initial offering size of 13.1m shares.
There could be more acquisition-fuelled capital raising in the near future. UK composite insurer Aviva, for example, announced it was buying US life and savings firm AmerUS for $2.9bn in July.
BNP Paribas said in a research note that it believes the company needs to issue debt to finance this transaction. It has already issued £900m ($1.7bn) of equity in relation to the buy, and BNP Paribas said it could issue as much as £2bn in debt.
Some of the future issuance will have nothing to do with acquisitions, however. Villarreal thinks German reinsurer Munich Re could come to market to issue hybrid debt. "Munich Re has a challenge," says Villarreal. "It wants to return capital to shareholders, because it has too much according to its economic capital model, but it may have to issue hybrid capital to replace it." He explains that is this is because a big drop in Munich Re's capital caused by such a release could worry rating agencies, which Munich Re is keen to avoid at the moment. "The company has a positive outlook from Standard & Poor's and it wants to be upgraded. It doesn't want to upset the cart at this point."
Villarreal adds, however, that although Munich Re has been considering such a move for a long time, this may not happen until next year.
