Chillin' out till it needs to be funded
Regulatory commitments have required Prudential to spend a week with FSA in the UK and Hongkong and marginalise the probability of it being able to assimilate AIG’s asia and international units on its terms. Check Section II
Meanwhile an Ex Lehman boutique breakaway Ondra partners, led the rights issue structuring with JPM and HSBC charging Pru $410mn for the underwriting of 11:2 rights issue at a 40% discount to market. To me the pricing shows a classic big deal desperation decimating the fast depleting value reserves of UK Capital Markets, making it a ‘Prime’ candidate after Spain breaks..
The Global Situation
According to a DB research US got off the entire crisis for just 4% of its GDP in ‘cost’ which has mostly turned out to be an earning investment, but the same is unlikely for Prudential and insurance entities . Also costs in UK are much higher with almost 100% stake in Rock and 75% and 80% stakes in Lloyds and RBS making FSA cagey in the insurer’s efforts to grow. In the meantime the influential Canary Wharf community of IB firms like Cazenove (JPM) and Cowen maintaining a low profile. Issue of $2bn new shares in Prudential also has investors in a tizzy. Europe CDS spreads remain above 250bp but much below Lehman and AIG’s worst at 600bp+
Saving on Costs
Meanwhile punters in the US focussed on the possible breakdown in value in the AIA deal with Prudential earning a discount after regulatory commitments force it to refuse some of its business in most countries. In India AIA is selling separately for a $190m from the Tatas for the 26% stake
Tidjane Thiam, the CEO of Prudential, was reportedly in New York on Thursday to make his case in person to AIG executives that the price for American International Assurance Co. Ltd or AIA deal should be cut. The move by Prudential comes after its shareholders complained that the deal was too expensive, especially because the company plans to sell $20 billion worth of new shares to help finance the deal. Shareholders are set to vote on the deal at the company’s June 7 annual general meeting.
Prudential needs approval of 75% of the shareholders for the AIA deal. Institutional investors with more than 15% of Prudential stock and private shareholders owning almost 5% plan to oppose the deal. BlackRock Inc., Fidelity Investments and Capital Group Cos. are among the major shareholders that have voiced concern about the deal.
Regulatory Risk Capital – maintaining a surplus in each insured pool
Here’s to Asia! At the risk of sounding liek the great Attlee ( I mean Hank Greenberg) Financial terorism is finally back with paranoid regulators. As despite all discussion of CARD and TBTF bank reform downed by jealous sounds of cutting comp, US is pretty much ready to play second fiddle as investors in Asia get ready to absorb $30bn from Prudential in rights as Asian domestic regulators have forced it to keep separate surpluses in each of the AIA units. What is still on is the quest to actually jettison its Asian operations after completing the AIA deal because of meaningful monopoly restrictions in each market.
“Prudential has agreed with the FSA that, in view of the risks associated with current market circumstances and the potential risks associated with the acquisition at, and for some time after, completion … it would be appropriate for Prudential to hold an enhanced level of capital,” the company said.
That “enhanced level” involves a commitment to ensure group capital resources of not less than 150 per cent of statutory requirements, even after certain stress tests.
In order to bolster its capital position, the Pru has changed its financing so that $5bn that was due to be raised as senior debt will now be $5.3bn raised in junior debt, which can count towards its capital base. AIG has said it will subscribe to almost $2bn of this if the Pru fails to find sufficient buyers in the markets.
The Pru has also arranged a £1bn contingent junior debt facility with its banks, which it will be able to draw down under certain stressed scenarios in order to maintain this 150 per cent surplus.
That 150 per cent level is the same as the Pru promised Hong Kong regulators it would maintain under their standards across the Asian units of AIA as a quid pro quo for the easing of some restrictions on capital held there, according to AIA insiders.
However, the Pru said on Monday that following completion of the AIA deal, about £1.1bn of capital would remain in AIA units in Hong Kong, Singapore and Thailand, and is therefore not included in the group’s capital calculations.