Prudential begins consent solicitation for two series of tier 2 notes

By Angela McDaniels

Tacoma, Wash., May 16 – Prudential plc began a consent solicitation for its £600 million 5% dated tier 2 notes due 2055 and £700 million 5.7% dated tier 2 notes due 2063, according to a noteholder notice.

The company is seeking to substitute the principal debtor under the notes, among other changes.

Holders who submit voting instructions – whether in favor of or against the extraordinary resolution – by the early voting deadline, noon ET on May 31, will receive the total early voting consideration, which is 8.5% for the 2055 notes and 13.25% for the 2063 notes.

Holders who submit voting instructions after the early voting deadline but prior to the final voting deadline, noon ET on June 5, will receive the voting fee, which is 2.125% for the 2055 notes and 3.25% for the 2063 notes.

The voting fees are contingent on the extraordinary resolution passing.

If the extraordinary resolution passes, the company will increase the coupon (and the margin used to set the coupon in the future) by 56 basis points on the 2055 notes and by 64 bps on the 2063 notes.

Holders will vote at meetings in London on June 10. The meeting time is 5 a.m. ET for holders of the 2055 notes and 5:15 a.m. ET for holders of the 2063 notes.

The meeting for the 2055 notes will require a quorum of one or more persons holding or representing a majority of the notes outstanding.

The meeting for the 2063 notes will require a quorum of one or more persons holding or representing at least two-thirds of the outstanding notes.

In order for the proposal to pass, it must be approved by not less than three-fourths of the persons voting at each meeting.

The proposal has been considered by a special committee of the Investment Association at the request of the company. The members of the special committee hold 27.37% of the outstanding 2055 notes and 45.25% of the outstanding 2063 notes. They have informed the company that they intend to vote in favor of the proposal.

Rationale

In March 2018, the company announced its intention to demerge its U.K. and Europe business (“M&G Prudential”), resulting in two separately listed companies.

On completion of the demerger, shareholders will hold interests in both Prudential and M&G Prudential.

Both series of notes are currently recognized and valued as tier 2 basic own funds under the European Union’s Solvency II Regulation. However, the recognition of the 2063 notes will cease after Dec. 31, 2025 if their conditions are not amended.

If the demerger is completed, the regulatory capital requirements of the company (if any) will not fall to be assessed by reference to the requirements of Solvency II. It is currently expected, however, that the regulatory capital requirements of M&G Prudential will fall to be assessed by reference to the requirements of Solvency II (subject to any changes to the legal and regulatory regime applicable to insurance businesses in the United Kingdom following the withdrawal of the United Kingdom from the European Union).

Prior to the demerger, Prudential and its subsidiaries expect to rebalance existing debt capital across the company and M&G Prudential. In connection with this rebalancing, and in light of the regulatory capital status of the notes and the capital regimes expected to apply to each of the company and M&G Prudential (if any) following the demerger, it is intended that a subsidiary Prudential that acts as the holding company of M&G Prudential (“New M&G Prudential HoldCo”) will be substituted as the principal debtor under the notes of the relevant series on or prior to the demerger.

In order to ensure that the 2063 notes are capable of recognition and valuation as tier 2 basic own funds of New M&G Prudential HoldCo under Solvency II, it is also intended that the terms and conditions of the 2063 notes will be modified in order to be Solvency II compliant without reliance on the Solvency II transitional provisions.

The substitution and, in the case of the 2063 notes, the solvency II modifications are expected to ensure that the notes can support the solvency II capital requirements of M&G Prudential.

The proposal is therefore intended to amend the issuer substitution condition applicable to the notes to permit such substitution.

In the case of 2063 notes, the proposed modifications also include the following:

• The inclusion of a specific reference to a minimum capital requirement in all circumstances in which the 2063 note conditions currently refer to the solvency capital requirement, including, without limitation, in respect of Condition 3.2 (which, if the amendment is implemented, will additionally specify that all payments under or arising from the 2063 notes will be conditional upon the company satisfying the minimum capital requirement); and

• The inclusion of a proviso that the company may only redeem or purchase the 2063 notes if on, and immediately following, the relevant date of redemption or purchase, no insolvent insurer winding-up has occurred and is continuing.

The amendment to the conditions of the 2063 notes will not be implemented until the Prudential Regulation Authority has given its prior approval or consented to such implementation. The company said the authority has been notified of the proposal and not raised any objections in principle.

Ratings

The company said it received confirmation from Fitch that the implementation of the amendments would not cause a downgrade or removal of the ratings of the notes.

The prevailing policies of Moody’s and S&P are not to provide similar rating confirmations. However, the company expects that the implementation of the amendment would result in the notes being rated on the same basis as the substitutable dated tier 2 notes issued by the company on Oct. 3, being A3 by Moody’s and BBB by S&P.

The solicitation agents are BNP Paribas (+44 20 7595 8668 or liability.management@bnpparibas.com), J.P. Morgan Securities plc (+44 20 7134 2468 or EMEA_LM@jpmorgan.com) and Lloyds Bank Corporate Markets plc (+44 20 1726/1719 or liability.management@lloydsbanking.com). The tabulation agent is Lucid Issuer Services Ltd. (+44 20 7704 0880 or prudential@lucid-is.com).

Prudential is a London-based life insurance and financial services company.

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