New Issue: IAG Capital Notes 2

On 21 November 2022, Insurance Australia Group Limited (ASX: IAG, the Issuer) launched an offer for Insurance Australia Group Capital Notes 2 (the Notes, expected ASX: IAGPE), to raise $400 million, with the ability to raise more or less. The purpose of the transaction is to raise regulatory capital (Additional Tier 1) for IAG, with the proceeds intended to refinance Insurance Australia Group Capital Notes 1 (ASX: IAGPD) that are reinvested in the Notes and for general corporate purposes.

These Notes are structured as unsecured, perpetual, convertible subordinated notes. Distributions are discretionary, non-cumulative, floating rate payments, franked at the same rate as IAG ordinary shares (currently 70%) and payable on a quarterly basis in arrears until IAGPE are redeemed, resold, converted or written-off. The margin is guided at [3.50% to 3.70%] p.a. above 90-day BBSW.

The Notes have no fixed maturity date but are scheduled for mandatory conversion into IAG ordinary shares on 15 March 2032, or later, when conversion conditions have been satisfied. At the Issuer’s discretion, and subject to approval by APRA, IAG can redeem or resell the Notes for cash at face value or convert the Notes into IAG ordinary shares on 15 June 2029, 15 September 2029, 15 December 2029 or 15 March 2030. The Notes may also be converted, redeemed, or resold if a Tax or Regulatory Event occurs, subject to APRA approval. The Notes will convert into IAG ordinary shares following an Acquisition Event, subject to conversion conditions.

We have fundamental credit comfort in IAG and recommend investors Subscribe given an appropriate and arguably attractive concession against ASX AT1 comparables.  At the left-hand side of the guided range, IAGPE offers a 30 basis point premium to our Insurance AUD AT1 curve, which we view as incorporating a healthy new issue concession. Additionally, as trading margin levels are currently elevated, the offered margin is 48-basis points above the last 12-month average fair value point on the comparable Suncorp AT1 curve at a 6.5 year constant tenor. This indicates that there is value when taking a longer-term investment perspective. Relative to the Big Four AT1 universe, the Offer screens as fair value, with a new issue premium to the B4 ASX-listed curve of 50bps, which is concessional to IAGPD’s 38bps delta at launch in November 2016.