MFC: Innovative Tier 1 Capital Issue

Manulife Financial has announced:

that Manulife Financial Capital Trust II (the “Trust”), a trust wholly-owned by The Manufacturers Life Insurance Company (“MLI”), will issue $1 billion of Manulife Financial Capital Trust II Notes – Series 1 due December 31, 2108 (“MaCS II – Series 1”). The MaCS II – Series 1 are expected to qualify as Tier 1 capital of MLI for regulatory purposes. The Trust intends to file a final prospectus with the Canadian securities regulators as soon as possible.

Interest on the MaCS II – Series 1 is payable semi-annually. From the date of issue to but excluding December 31, 2019, the rate of interest on the MaCS II – Series 1 will be fixed at 7.405% per annum. Starting on December 31, 2019, and on every fifth anniversary after such date, the rate of interest on the MaCS II – Series 1 will be reset as described in the prospectus filed by the Trust and MLI.
On or after December 31, 2014, the Trust may, at its option and subject to certain conditions, redeem the MaCS II – Series 1, in whole or in part.

In certain circumstances, the MaCS II – Series 1 or interest thereon may be automatically exchanged or paid by the issuance of non-cumulative Class 1 Preferred Shares of MLI.

The transaction is expected to close on July 10, 2009. An amount equivalent to the net proceeds will be used by Manulife Financial Corporation (“MFC”) to acquire liquid assets for possible future retirement of amounts outstanding under MFC’s credit facility or for general corporate purposes. The offering is not expected to initially result in an increase to MLI’s reported MCCSR ratio (Minimum Continuing Capital and Surplus Requirements for Life Insurance Companies).

The use of proceeds is not entirely clear to me, but no prospectus is yet available. MLI has “Adjusted Net Tier 1 Capital” of a little under $13.6-billion as of 1Q09, according to OSFI, and these notes, according to the press release, will add to this total. But the offering is not expected to increase MLI’s MCCSR, and proceeds may be used to pay of MFC’s debt.

So how will the money flow from MLI to its parent MFC? Share buyback? Redemption of bonds? Enormous dividend? It must be out of Tier 1 Capital somehow, but it’s just not clear.

Be that as it may, the yield of 7.405% seems about right. MFC’s preferreds are trading to yield around 6.4% (the perps) or 4.85%-5.35% for the fixed Resets. The reset mechanism of this new issue is not specified in the press release, but can probably be expected to be similar to FixedResets (check the prospectus!).

Most importantly, however, these notes are Tier 1 Capital of the operating subsidiary, not the parent, which is worth a notch or two in credit quality all by itself. DBRS rates MLI‘s prefs at Pfd-1 and sub-debt at AA(low), compared to MFC’s Pfd-1(low) and senior debt (MTNs) at AA(low).

Update 2009-7-7: From the Preliminary Prospectus (via SEDAR):

The gross proceeds to the Trust from the Offering of $

One Response to “MFC: Innovative Tier 1 Capital Issue”

  1. […] response or acknowledgement from MFC regarding my queries on the MLI IT1C issue. What a […]

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