An AT1-like marketplace for niche insurance notes comes back to life with AXA’s debut

(Bloomberg) — The Restricted Tier 1 bond market — the insurance industry’s AT1 equivalent, which hasn’t seen a single euro offering since the summer of 2021 — is roaring back with a record deal from AXA SA. More may follow as a deadline for older types of banknote looms.

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The French insurer sold 1.5 billion euros ($1.64 billion) of RT1 notes, for which it received orders for almost 8 billion euros, according to a person familiar with the matter, who spoke on condition of anonymity because he was not authorized to speak. AXA’s debut RT1 deal marks the largest sale of a single tranche of the securities based on data compiled by Bloomberg.

The offering heralds the end of the fallow period for RT1. The market has rallied steadily since the creation of the securities in 2017, but issuance in other currencies has been scarce in the past few years due to high interest rates and after sentiment was hit by Credit Suisse’s $17 billion AT1 write-off.

A deadline of the end of 2025, which would put at least 14 billion euros of older notes out of compliance with post-financial crisis regulations, could spur more sales as insurers seek to meet capital requirements.

“The end of the prior period will create additional strength for some of the large issuers to sell RT1, but it will depend on the price,” said Marcos Alvarez, global head of underwriting at Morningstar DBRS, referring to a 10-year grace period that insurers have been given to deal with junior bonds. “Issuers and investors got scared after the failure of Credit Suisse. Now some issuers are thinking about RT1 again.”

AXA is one of the insurers most reliant on so-called old bonds, with at least 2.3 billion euros of old-school bonds still outstanding, based on data compiled by Bloomberg.

AXA representatives did not respond to requests for comment.

The rules that insurers must comply with, called Solvency II, came into force in 2016 with the aim of making insurance companies more resilient after the global financial crisis. Solvency II dictates capital requirements for insurers and incentivizes the creation of RT1 notes as a capital buffer that works similarly to AT1 bonds for banks.

RT1s are permanent, interest payments can be cancelled, and holders must absorb losses through principal write-downs or equity conversions once regulatory capital falls below a threshold—typically below 75% for the Solvency Capital Ratio.

AXA last reported a Solvency II ratio of 230% at the end of September 2023. It was this strong level that allowed the insurer to buy a non-backed bond last summer without refinancing it, CreditSights Inc analysts Martina Seydoux and Larissa wrote Nepper when the company reported results.

Over the past year, European insurers have been actively reducing their exposure to old-school notes. Some companies issued eligible types of equity while buying back billions of dollars worth of old notes, in some cases causing a spike in secondary market prices.

Read: Insurers buy back junior debt as $23 billion deadline looms

Last week, Allianz SE, Europe’s largest insurer and the largest issuer of RT1 bonds, issued a new second-tier instrument while offering to buy part or all of the €1.5 billion issue: the largest remaining bond, covered by inheritance rules. Tier 2 bonds are above RT1 in insurers’ capital stacks and have been more popular during the period of high interest rates and fragile sentiment.

The AXA deal was at a coupon of 6.375 percent, lower than initial price discussions amid strong demand, a person familiar with the matter said. AXA held talks with investors on Monday ahead of the launch of the offering, they said. Bonds used to determine the price level include RT1 from other insurers and AT1 from major French banks.

“Having a big name like AXA has a positive impact. This market is not as liquid and deep compared to the banks’ AT1, but we already have some big names participating and one more will help,” Morningstar’s Alvarez said.

(Updates bond terms in third, 13th paragraph.)

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