Royal & Sun Alliance exchanges $425.694 million 8.95% bonds

By Jennifer Chiou

New York, May 9 - Royal & Sun Alliance Insurance Group plc said it accepted $425.694 million or 85.1% of its $500 million of 8.95% subordinated guaranteed bonds due 2029 in its exchange offer.

As a result it will issue £297.279 million of new notes, with settlement on May 12.

Due to market demand, Royal & Sun will also issue £77.721 million of additional notes for cash, bringing the total size of the new issue to £375 million.

As announced on April 20, Royal & Sun Alliance is seeking to replace its 8.95% bonds with sterling-denominated perpetual guaranteed capital securities in order to improve its balance sheet and strengthen the regulatory capital position of the group.

Under the exchange, Royal & Sun Alliance offered sterling perpetual guaranteed bonds for the Yankee bonds and added it may also sell additional sterling perpetual guaranteed bonds for cash and use proceeds to support its general insurance activities.

The tender price for the new notes was set using a spread of 119 basis points over the benchmark rate of 5.317% for the 5 3/8% U.S. Treasury due Feb. 15, 2031, giving an exchange price of 129.158.

For the new notes, pricing used a spread of 187 basis points over the benchmark rate of 4.724% for the 4¾% U.K. Treasury due Sept. 7, 2015.

The new notes have a coupon of 6.701% and were priced at par. They will be callable starting July 12, 2017.

Royal & Sun will also pay $6.71 for accrued interest on the existing notes.

The offer was in two parts - a direct exchange for investors outside the United States and a tender offer being conducted by Merrill Lynch. Merrill will then exchange any bonds tendered.

At the early participation deadline of 5 p.m. ET on May 4, holders of $38.814 million of bonds tendered their securities to Merrill.

For each $1,000 principal amount of bonds, Merrill Lynch will pay $1,282.31, which includes the $40.00 early participation payment.

The consideration for each $1,000 principal amount of bonds tendered is 125 basis points over the bid-side yield of the 5.375% Treasury note due Feb. 15, 2031.

Pricing was determined at 10 a.m. ET on May 4. The reference yield is 5.322% and the tender offer yield is 6.572%.

All holders who tendered will receive accrued interest up to but excluding the payment date.

On May 2, the company said it fixed the spread for the new sterling perpetual guaranteed bonds to be issued in its exchange for any or all of the dollar-denominated subordinated bonds at 187 basis points over the bid-side yield of the 4¾% U.K. Treasury due Sept. 7, 2015.

The exchange ended at 10 a.m. ET on May 5. The tender offer via Merrill runs through May 18 and could result in additional new notes being issued.

Royal & Sun Alliance is a property and casualty insurance group based in London.

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