Modelled on bank tier 1 capital, the structure enabled Fortis to raise tax efficient, non-dilutive capital, refinance acquisition related short term debt, and ensure favourable accounting and rating agency treatment.
"This creates a new benchmark for insurance companies seeking to optimise their capital structure," said Amir Hoveyda, director, financial institutions group at Merrill Lynch.
Launched via Fortis Captial Funding Trust an SPV of Amev Leven, the capital securities are rated A1 by Moody's and A by Fitch IBCA. They benefit from a subordinated guarantee from Amev Leven and are guaranteed on a joint and several basis by Fortis (B) and Fortis (NV).
Unlike previous perpetual step-up subordinated issues for insurance companies, which have been cumulative, the Fortis capital securities are non-cumulative. Should the company have to suspend payments, investors will forgo interest payments.
Additionally, the non-cumulative capital securities are reimbursed after senior and subordinated creditors of guarantors Fortis (B) and Fortis (NV).
These features enable the Fortis capital securities to be accounted as minority interest, rather than debt, on Fortis' consolidated balance sheet. This ensures more favourable equity treatment of the transaction by the rating agencies.
"If you look at the structure, it basically copies the tier 1 capital of banks," said Michel Baise, finance director of Fortis. "We have applied it to insurance companies as we believe that in the foreseeable future insurance companies will be regulated in a similar way to banks.
"We will then have on our books an instrument that is instantly recognised as tier 1 capital."
The issue was split into three tranches, all callable from year 10: a Eu400m FRN paying three month Euribor plus 130bp, stepping up to Euribor plus 230bp; a Eu200m fixed rate tranche paying 169bp over the July 2009 Bund to the 10 year call, stepping up to Euribor plus 230bp; and a fixed rate tranche paying Eu50m 6.25% and without a step up.
The pricing of the Eu200m fixed rate tranche is equivalent to Euribor plus 130bp, like the Eu400m FRN tranche. The 6.25% tranche, targeted at retail accounts, was reduced to accommodate strong demand from institutions for the two other tranches.
Institutional demand was boosted by the 100% risk weighting, which encouraged banks to participate.
Extensive premarketing ensured that the deal was sold at the time of launch, with insurance companies and pension funds the other main buyers.
The proceeds of the issue are being used to refinance short term debt used to acquire the US health insurance company John Alden in 1998.
The capital securities transaction follows Fortis' debut euro transaction in late March, and further enhances the borrower's profile.
Tranche 1: Eu400m
Maturity: perpetual
Issue/fixed re-offer price: 100.00
Coupon: three month Euribor plus 130bp until 27/04/09; three month Euribor plus 230bp thereafter
Call option: at par from 27/04/09
Tranche 2: Eu200m
Maturity: perpetual
Issue/fixed re-offer price: 99.32
Coupon: 5.5% until 27/04/99; three month Euribor plus 230bp thereafter
Call option: at par from 27/04/09
Spread at re-offer: 169bp over the 4% July 2009 Bund to the 10 year call
Tranche 3: Eu50m
Maturity: perpetual
Issue/fixed re-offer price: 100.00
Coupon: 6.25%
Call option: at par from 30/06/09
Launched: Monday April 19
Sole mgr: Merrill Lynch *
