SpotLight: Misunderstood Call Dates
Allianz sent shockwaves through the market of subordinated insurance bonds yesterday when the issuer did not give notice to call the Allianz 3.875% perp on its first call date on 7 March 2022. Investors lost quickly a bit of confidence in the call discipline of European insurers. As a result, bonds with low back-ends came under pressure. We are surprised to see that so many market participants were surprised by Allianz as the issuer remained in fact very consistent and disciplined. In addition, it was already the second time that the market got the extension risk of this bond wrong. The resulting turmoil opened now in our view interesting windows of opportunity for bottom fishing of bonds with low back ends.
Rötger Franz, Partner, Plenum Investments Ltd.
No call discipline for retail bonds
Allianz does not have an official “call policy” and there are legal restrictions for the issuers to commit to their willingness to call bonds at the first call date. Generally speaking, Allianz and other insurers distinguish between two types of traded bond issues, i.e. institutional and retail bonds. These terms are commonly used regardless of the type of actual investor base holding a particular bond. In this context, institutional bonds have usually a step-up and in most cases large minimum increments of EUR/USD/GBP100-200k. Over the past 15 years insurers have built a strong and impressive track record of meeting investor expectations to call these bonds at their first call dates regardless of the refinancing cost. Exceptions from this rule have been very rare. Retail bonds have usually no step-ups and a fixed-for-life structure as well as in many cases (but not always) smaller minimum increments. In the past, insurers have been very clear that they intend to call these bonds on a purely “economic” basis, i.e. only if the bond can be refinanced at a lower coupon.
Institutional bonds are called at the first call date
Allianz is a good example of this approach. The issuer has so far called all outstanding institutional bonds with a step-up on their first call dates. Retail bonds were in many cases left outstanding. E.g. the Allianz 5.5% perp and Allianz 5.375% perp were grandfathered restricted Tier 1 bonds and fixed-for-life. The Allianz 5.5% perp had its first call date on 26 September 2018 and the Allianz 5.375% perp on 3 March 2011. Both bonds were left outstanding after their first call dates. Since the Solvency II regulatory regime came into force in 2016, Allianz consistently communicated that the issuer intended to replace both grandfathered restricted Tier 1 with new Solvency II-compliant restricted Tier 1 bonds but initially taxation issues prevented Allianz to come to the market. Once these issues were resolved Allianz started to issue new restricted Tier 1 paper in Q420 and redeemed both bonds as expected. Interestingly, the market only priced the Allianz 5.5% perp to a call in 2021 while the other bond was priced to a call at the end of the grandfathering period in 2025.
Similar mis-understanding in 2021
The Allianz 3.875% perp which was not called yesterday had only been issued in 2016. The bond is a fixed-for-life and classified as Solvency II-compliant Tier 2. Allianz had been very clear in its communication that the bond is considered “permanent capital”. The bond was targeted at Asian HNWIs although many institutional investors participated in the bond issue as well. Interestingly, many investors appeared to have ignored the extension risk of the bond and only became aware of it in the weeks after the bond issue. Hence the bond fell substantially in its first weeks of trading.
Summary
Given the recent rise in rates and hawkish comments by the central banks it would have been at least very difficult for Allianz to refinance the Allianz 3.875% perp at a lower coupon. The outstanding bond is now callable at any time giving the issuer a lot of flexibility. I.e. the decision not to call the Allianz 3.875% perp was rational and in line with the issuer’s and the industry’s track record and is no reason to doubt the issuer’s or the industry’s call discipline.
Your sincerlely
Plenum Investments Ltd.
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