Munich Re to Issue €1 Billion in Bonds; Best, S&P Comment

Munich Re announced that it is preparing to issue a subordinated bond for approximately €1 billion ($1.3456 billion). The reinsurer described the debt issue as “a perpetual bond and callable by Munich Re from ten years after the date of issue. Up to then, it will have a fixed coupon rate and thereafter a floating rate. Under certain conditions, which Munich Re will fulfil with this issue, subordinated bonds are treated by supervisory authorities and rating agencies as equity.”

A.M. Best Co. its “a” rating to the proposed issue, indicating that it “reflects its subordination to senior debt and its deferral features. The notching of the debt rating from the issuer credit rating of “aa-” of the issuer factors that policyholder and senior debtholder rank pari passu in Germany.” Best said it would “credit these hybrid securities up to a limit of 20 percent of total adjusted capital.”

Standard & Poor’s Ratings Services assigned an “A” junior subordinated long-term debt rating to the proposed issue. S&P rates Munich Re “AA-” with a stable outlook. “The two-notch differential between the counterparty credit rating on Munich Re and the rating assigned to the proposed bonds reflects the bonds’ subordinated nature and optional interest deferability,” explained S&P credit analyst Karin Clemens.

The issue will not be registered, offered or sold in jurisdictions where legal requirements mandate such procedures, including the U.S., Japan, Australia and other countries.

Munich Re explained that the “volume of the issue and other features of the bond, such as coupon rate and offering price, will be determined in a book-building process. These actions will occur – “subject to market developments” – following a “road show” to potential institutional investors, during the first week in June.

Munich Re described the bond issue as part of its “active capital management in its Changing Gear program.” Jörg Schneider, Munich Re’s CFO, commented: “We are following up our words with actions. Raising subordinated capital is one way of optimizing our capital structure and hence our cost of capital. In doing this now, we are taking advantage of the favorable capital market environment.”