About the company
FWD Limited is the insurance arm of Hong Kong-based Pacific Century Group (PCG), a private investment firm founded by Richard Li in 1993, with three main business segments: financial services, technology, media and telecommunications (TMT), and real estate. FWD was founded in 2013 when PCG acquired the Hong Kong, Macau and Thailand insurance business of ING Group N.V. and is the holding company for 5 wholly-owned operating companies in HK and Macau, with the largest being FWD Life Hong Kong. FWD recently entered the Singapore market in early 2016 with the acquisition of a 90% stake in Shenton Insurance from Parkway Holdings Ltd, a subsidiary of IHH Healthcare Berhad. At the time of writing, FWD Limited is rated investment-grade Baa2/BBB by Moody's and Fitch.
Diversified and growing business with strong ownership structure
It is interesting to note FWD has a strong ownership structure, with Richard Li (son of Li Ka Shing) the majority shareholder (84.4%) of the company and Switzerland reinsurer Swiss Re owning 14.9%. Since its inception in 2013, the company has built up a strong brand positioning in the Hong Kong and Macau market, rated among the top life insurers based on an APE (annual premium equivalent) basis. As of end-Sep 16, it had over 450,000 corporate and individual customers and total assets of US$11.1b, representing an annualized growth rate of 20%. FWD also has a well-established corporate governance structure in place, backed by a rigorous risk management framework, with strong board and management oversight on its asset-liability management policies.
The company also sports a conservative credit profile, with US$420m in borrowings from its outstanding bond and US$359.5m in cash (as of end-Jun 16), representing a net debt-to-assets of just 0.6%. Furthermore, we note that FWD has historically maintained stable solvency through varied market conditions, with an average solvency ratio (net assets/liabilities) of around 230%, within the management's targeted range of between 200% and 250%. The management has also guided that it intends to selectively move down the credit scale to investment in more BBB/BBB+ credits as well as increase its exposure to alternative assets such as private equity and infrastructure debt in order to mitigate interest rate risk.
Structure of the new bonds
Following our attendance at the firm's roadshow held last week, we gather that an upcoming USD bond issue would either be a perpNC5 or perpNC10 issue, although an NC5 structure is more likely. However, these perps will not feature a coupon step-up upon a non-call on its first callable date; instead, the coupon will reset based on the prevailing US Treasury rate plus the initial spread at issuance. FWD will also have the option to defer its coupon payments, which will be cumulative and compounding.
The perps are expected to be rated Ba1/BB+ from Moody's and Fitch, rated two notches below its issuer ratings and reflecting the subordinated structure of perpetual securities and ranking below its senior unsecured debt (its existing FWDINS 5% 09/24/24s are rated investment-grade of Baa2/BBB by Moody's/Fitch). FWD has received 50% equity credit treatment from the ratings agencies, where only 50% of the perps are classified as debt in the credit rating agency's assessment of its credit ratings, which will not expire (whereas under accounting treatment, the perps are recorded as equity). Investors should also note that FWD has the option to call these perps at a price of 101 in a change-of-control event, with a coupon step-up of 500bps applicable if it does not exercise its redemption rights, providing some protection to bondholders should Richard Li cease to control FWD.
Thoughts on pricing
The upcoming perpetual bond issue will likely be priced with its existing FWDINS 5% 09/24/24s in mind, adjusting for the subordinated nature of the perps against its senior debt. The FWDINS 5% 09/24/24s are currently trading at spreads of about 206 bps over UST (YTM: 4.297%), with 7.7 years to maturity.
Looking at the peer comparable universe, the few Asian insurers with outstanding USD perps include Korean Reinsurance and China Taiping Insurance. Korean reinsurance's KORREI 4.5% 10/21/44s (rated BBB+ from S&P) currently trade at a 191bps spread over UST, with a YTC of 3.57%. For China Taiping Insurance, its CTIH 5.45% 09/29/49s (rated BBB-/BBB+ by S&P/Fitch) presently trade at a spread of 209 bps over UST (YTC: 3.73%), which represents about 42bps premium over its senior debt (CTIH 4 ? 11/21/22s; CTIH 6 10/18/23), with the narrow premium likely reflecting its investment-grade ratings in view of its business scale and Chinese state-ownership of theconglomerate.
Given the strong ownership structure of FWD and its conservative gearing levels, we think that a spread premium of between 70bps and 90bps over its existing FWDINS 5% 09/24/24s would be appropriate, mitigating its expected non-investment grade ratings (Ba1/BB+ from Moody's/ Fitch), which entail "fair value" yields of 4.7% - 4.9% for a perpNC5 and 5.2% - 5.45% for a perp NC10 structure based on prevailing US Treasuries. However, we note that on an absolute basis, these yields may not be attractive given the coupon rate of its outstanding FWDINS 5% 09/24/24s, as well as the lack of a coupon step-up to incentivise the issuer to call on its first call date. We hence think that for such an issue to be deemed attractive, pricing at around a mid-5% level for a perpNC5 (or a low- to mid-6% for a perpNC10, given the greater durational uncertainty) would be required.
