QBE manages price expectations to price PNV trade
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QBE manages price expectations to price PNV trade

QBE Insurance braved it alone in the subordinated market this week as it became the second Australian financial to tap the dollar market for a tier two bond that would convert to equity or write down upon point of non-viability (PNV).

The insurer took advantage of the most recent Draghi rally, sparked by European Central Bank president Mario Draghi’s dovish comments last week, to sell the rare structure after taking it on roadshow the week before.  

The $700m 30 year non-call 10 deal followed trades with similar structures this year from ANZ and National Australia Bank. NAB’s deal, sold on November 5, was the first tier two with a PNV trigger to be sold in the euro market. ANZ’s deal, sold in March, was the first such deal to be sold into the Yankee market.

The deal will partially or completely convert to ordinary QBE shares if the Australian Prudential Regulation Authority deems the company is non-viable. If a conversion does not take place within five trading days after that event, the notes are written off.

Lead managers Goldman Sachs, HSBC, Morgan Stanley and NAB put out initial price thoughts for the deal at 7% area on Monday morning. Leads set guidance in the early afternoon at 6.875% area, plus or minus 0.125% and priced the deal at 6.75% from a $2bn book.

A shaky dynamic in the market the week before had some thinking the year might be over for subordinated debt and capital trades, but QBE managed expectations for pricing during the roadshow and offered investors an attractive yield to ensure the deal’s success, according to a DCM banker on the deal.

“I would not have wanted to put a sub deal out today, or for the remainder of 2014 for that matter,” said a syndicate banker away from the deal. “But they roadshowed this deal and they want to get it done and it looks priced to sell.”

For a comparison, the banker pointed to the issuer’s outstanding 7.25% dollar bond with a 2041 maturity and non-call period until 2021, which was trading at around 335bp over mid-swaps on Monday morning.

The rarity of the structure would call for an additional premium, the banker added, estimating that at the initial pricing talk level, which translates to 455bp over, represents an all-in 45bp new issue premium.

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