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Mind The Optionality

18 September 2018 by lberuti

Today was another session where the attention of most investors was firmly on the roll which comes on Thursday. An overwhelming majority of the trades done at the moment consists in shifting positions from the current 5-year maturity (Jun23) to the next on the run 5-year maturity (Dec23). Nevertheless, there are pockets of activity, and news that PRUFIN ( Prudential Plc ) has mandated 6 banks as joint-lead managers to arrange a series of bond issues caught investors’ attention. Benchmark Tier 2 transactions are expected in GBP (one with a 33-year maturity non-callable for 13 years and one with a 50-year maturity non-callable for 30 years) and in USD (with a 30-year maturity non-callable for 10 years). While it increases the likelihood that the market sees a consent solicitation on existing securities which should be a positive, the new notes will feature an option to substitute the issuer for a newly established holding company of the M&G Prudential business. Hence it opens the door for a succession event on CDS currently referencing PRUFIN. As a result, even if the 5-year risk premium of PRUFIN’s senior debt closed unchanged on the day, the 5-year risk premium of its subordinated debt was pushed 6bps wider at 90bps.