PrefBlog

Manulife Financial Corporation has announced

that it has priced a public offering in the United States of U.S.$1.1 billion aggregate principal amount of two series of its senior notes consisting of U.S.$600 million aggregate principal amount of 3.40% senior notes due 2015 (the “2015 Notes”) and U.S.$500 million aggregate principal amount of 4.90% senior notes due 2020 (the “2020 Notes”). The public offering price of the 2015 Notes is 99.854% and the public offering price of the 2020 Notes is 99.844%. The offering was made pursuant to an effective shelf registration statement.

The Company intends to use the net proceeds from the sale of the notes for general corporate purposes, including investments in its subsidiaries.

Morgan Stanley & Co. Incorporated, Citigroup Global Markets Inc., Banc of America Securities LLC and Goldman, Sachs & Co. are acting as joint book-running managers for the offering.

At 3.40%, the five-year notes yield 215bp over Treasuries; meanwhile, I see on CBID that the recent CAD 4.079% of 2015 are yielding 4.16%, about 205bp over Canadas.

These yields may be contrasted with the MFC sort-of-short-term preferreds:

To the extent one is fearful that the extension risk will apply (or, to take a more extreme view, that they may actually go bankrupt in the next five years, which will presumably wipe out preferred shareholders while merely hurting the debtholders), there should be a premium on the preferreds; but given that the Bid Yield to Presumed Call will be received as the net amount of dividends and the expected capital loss on call, then those yields may be multiplied by the standard factor of 1.4x to give interest-equivalent yields in the range of 5.62%-6.08% … which seems like an awfully strong inducement.

The debt issue are interesting for another reason … there is some thought that MFC has maxed out on debt:

Manulife Financial Corp.’s US$1.1-billion debt raise (US$600-million in 5-year notes at 3.40% and US$500-million in 10-year notes at 4.90%) would bring its debt (plus preferreds and hybrids) to total capital ratio up to 30% from 27.7%.

That’s probably at the top end of Manulife’s range and above its long-term 25% target, according to BMO Capital Markets analyst Tom MacKinnon. As a result, he believes the company has little room for more debt or preferreds.

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Note, however, that the smaller IAG was confirmed at Pfd-2(high) in February with higher gross leverage:

Capitalization has become more aggressive, in line with that of the industry, with a total debt ratio of 32% at the end of 2009, increasing to 33.2% pro forma a $200 million preferred and common share issue in mid-February. Within the last two years, Canadian life insurance companies have been increasing their financial leverage to better maximize return on equity, while also optimizing regulatory capital in a low interest rate environment. The Company’s adjusted debt ratio, which gives some equity treatment to preferred shares, was 22.6% at year-end, falling to 22% following the February issues, which is within DBRS’s tolerance for the current credit rating. However, the Company’s use of hybrid capital instruments such as preferred shares has increased over the past two years, significantly reducing its fixed-charge coverage ratio, which has fallen from double digits in the pre-2008 period to 6.0 times in 2009, notwithstanding the return to normal profitability.

This entry was posted on Wednesday, September 15th, 2010 at 12:49 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.