Swiss Re $1 billion convertibles talked at 3.25-3.5% yield, 20-25% premium

By Ronda Fears

Nashville, Tenn., Nov. 13 - Swiss Re America Holding Co. launched a $1 billion 20-year convertible offering Tuesday that is set to price after the close Wednesday. The Rule 144A issue comes to market via joint lead managers J.P. Morgan, Morgan Stanley and Credit Suisse First Boston. The 20-year bond will be convertible for the first 10 years, with price talk of 3.25% to 3.50% yield and a 20% to 25% initial conversion premium. In 2011, the bond switches to a floating rate note, stepping up to 100 basis points over Swiss Re's current credit spread to Libor.

The subordinated convertible bonds are non-callable for five years, then with a 120% trigger. S&P has assigned an AA junior subordinated debt rating to the convertible. The bonds are guaranteed by the Switzerland-based parent, Swiss Reinsurance Co. The bonds are being issued in tandem with an equity offering comprised of a 1-for-10 rights issue to shareholders in a public offering in Switzerland and to institutional investors elsewhere.

Total proceeds of about SFr4.8 billion are be used to cover the cost of the pending $2 billion acquisition of the life reinsurance business of Lincoln National Corp.

"The key to valuing this convertible is its odd structure and the implication of this on the credit. After 10 years the bond ceases to be convertible and becomes an unconditionally callable floating-rate note with a punitive interest rate. The bond is also subordinated," said Deutsche Banc Alex Brown convertible analysts. "These two features effectively mean the bond has equity treatment as far as the rating agencies are concerned but will have obvious implications for the credit spread. We have modeled the bond as a 10-year convertible but with a high credit spread. We would expect asset swap demand to be limited, but would expect more accounts to hedge the credit using 10-year credit default swaps."

Deutsche puts the Swiss Re convert pricing about 2.25% to 6% cheap with an implied volatility of 16.2% to 21.7% at the mid-point of the price talk, assuming a credit spread of 100 basis points over Libor, a stock borrow cost of 75 basis points and 25% volatility in the stock.

Swiss Re, the world's number two reinsurer, said on Tuesday that existing shareholders subscribed to 41% of the rights issue of new shares, which leaves 59% to be sold elsewhere. The firm said that at the end of the subscription period on Monday, shareholders had underwritten 11.7 million of the total 28.5 million shares being offered. The issue price of the new shares will be announced before Thursday's start of trade, which will be the price used to assign the conversion price to the convertible.

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