Aviva Plans $1.9 Billion Bond Issue – Rating Agencies React

September 11, 2003

Aviva Plc., the U.K.’s largest insurer, announced plans to raise £1.2 billion ($1.91 billion) in new capital through the issuance of junior subordinated bonds. Plans call for the issue to be completed by the end of the month.

With interest rates low, insurance rates hardening and equity markets showing signs of recovery, taking on additional debt in order to increase capacity has become an attractive proposition for many insurers. A short time ago the rating agencies often looked upon announcements of debt increases as negative factors, but that may be changing.

Standard & Poor’s Ratings Services assigned its ‘A-‘ long-term debt rating to the proposed bond issue, and also took the opportunity to reaffirm its ratings on the core operating entities of the Aviva group, “including its ‘AA-/A-1+’ counterparty credit and ‘AA-‘ insurer financial strength ratings on CGU International Insurance PLC (CGUII), and its ‘AA’ counterparty credit and insurer financial strength ratings on Norwich Union Life & Pensions Ltd.” S&P said the outlook on all entities is stable.

Moody’s Investors Service assigned “prospective (P)A2 ratings” on the new issue. However, it also said it “has revised from stable to negative its rating outlook on Aviva’s Aa3 senior and A2 subordinated debt ratings as well as on the Aa2 insurance financial strength rating (IFSR) of the group’s main UK general insurance and life insurance operations.”

Moody’s indicated that “the change in rating outlook reflects a minor deterioration in Aviva’s credit risk profile, as the proposed increased debt leverage will inherently place some added pressure on the group’s cash flows.”

S&P explained that its slightly lower rating on the bonds reflected their subordinate status relative to senior creditors. It is maintaining the stable outlook, as it “reflects Standard & Poor’s expectation that Aviva will be a winner in the consolidating U.K. life market, based on its scale and flexible business model, both by product type and distribution mode. Capital within the U.K. life with-profits companies is expected to be maintained at very strong levels of more than 10% of asset shares.”

Moody’s described its more cautious approach as the result of concerns over Aviva’s “financial leverage and the coverage of its debt service over the next 12 to 18 months.” It said it would “be monitoring the development of the group’s capitalisation,” but also noted the group’s basic strength. However, “a deterioration in the group’s key credit metrics as a result of its increased debt leverage could potentially prompt a rating review.”

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