Standard & Poor’s Ratings Services said today that it had assigned its ‘A’ long-term issue rating to the proposed dated callable subordinated fixed- to floating-rate notes to be issued by Hannover Finance (Luxembourg) S.A. (not rated). The notes would be guaranteed on a subordinated basis by Germany-based reinsurer Hannover Rueckversicherung AG (Hannover Re; AA-/Stable/–). The rating is subject to our review of the final terms and conditions.
Here follows Standard & Poor’s report :
The rating reflects our standard notching for subordinated debt issues: We have rated the proposed bonds two notches below the long-term counterparty credit rating on the guarantor Hannover Re. The rating is based on our understanding that:
– The notes will be subordinated to senior creditors of the guarantor.
– Interest deferral can occur at the option of the issuer, if during the previous six-month period (1) no dividend or other distribution of the guarantor was declared, and no other distribution or payment was made in respect of any class of shares, (2) no payment on account of the balance-sheet profit has been made by the guarantor since the most recent ordinary general meeting of shareholders, or (3) there was no repurchase of shares of the guarantor for cash.
– Interest deferral is mandatory if a solvency event has occurred and is continuing, if an insolvency event would be triggered by interest payments, or if the supervisory authority prohibits payments on the notes.
We understand that the instruments will have a tenor of at least 30 years, but will be callable at the option of the issuer about 10 years after issuance and on any quarterly interest payment date thereafter. The coupon is fixed until the first call date. After that, the interest rate will convert into a floating rate based on the three-month Euro Interbank Offered Rate, plus a margin (including a 100 basis point step-up), and be payable quarterly.
We expect to classify the bonds as having “intermediate equity content” under our hybrid capital criteria. We include securities of this nature up to a maximum of 25% of total adjusted capital, which forms the basis of our consolidated risk-based capital analysis of insurance and reinsurance companies. Such inclusion is subject to the bonds being considered eligible for regulatory solvency treatment and the aggregate amount of included hybrid capital not exceeding the total eligible for regulatory solvency treatment.
We understand that Hannover Finance plans to issue these instruments for general corporate purposes of the Hannover Re group and to take advantage of current financing conditions. Including this transaction, we estimate that the Hannover Re group’s financial leverage (debt plus hybrid capital, divided by the sum of economic capital available, debt, and hybrid capital) and fixed-charge coverage (EBITDA divided by senior and subordinated debt interest) will remain in line with the rating level at about 17%-19% and 7x-8x, respectively, in 2012 and 2013.