The innovative structure designed by Swiss Re was the first equity-linked issue from a financial institution to get full equity credit from rating agencies Moody's and Standard & Poor's.
Lead managers BNP Paribas and Merrill Lynch faced a barrage of orders when they opened the book at 7am London time. The deal was covered within 30 minutes, though the leads kept it open until 10am, by which time they had gathered Eu5bn of orders.
Swiss Re has long been an innovative user of the capital markets, and with this issue the key achievement was that Moody's agreed to count the deal in its ?E' basket (100% equity credit) while S&P classed it in its hybrid basket, which allows equity issues to constitute up to 25% of total adjusted capital.
Another clever twist to the deal that proved profitable for Swiss Re was that of the 12.7m Swiss Re shares underpinning the bonds, 9.2m were recycled from a $1.15bn 20 year convertible bond it had issued in 2001.
Because that CB is far out of the money there was little danger to Swiss Re in moving the shares to the new bond. However, to protect itself against a conversion of the old bond, Swiss Re bought 9.2m call options on its own stock from BNPP and Merrill.
This enhanced the attractiveness of the bond to Swiss Re. The firm made a profit on the transaction because it bought the call options at a lower price than it had sold the call options embedded in the previous bond. However, neither Swiss Re nor the leads have confirmed how large the gain was.
Merrill Lynch was particularly pleased with the transaction and made it the focus of an advertising campaign featuring a rabbit being pulled out of a hat.
Even if the idea had come from Swiss Re, Merrill Lynch ? along with BNPP, which was chosen for its derivatives expertise ? performed well on the deal, and the bond traded up in the aftermarket, after being priced at an attractive level for investors.