Consenting to change… at a price

Prudential plc is a well-established UK insurer, with a growing international operation in the US and Asia. The company announced significant changes to its business in March 2018, with plans to spin off its UK insurance and asset management business into a new UK-listed company (M&G Pru), with a separate entity (Pru plc) retaining the Asian and US operations. Management believes that running with two distinct entities would better facilitate the pursuit of strategies aligned to their opportunities.

When Prudential came to the market in September 2018 – ostensibly to help fund the new M&G Pru entity – it was clear that the amount raised at the time would not be sufficient to fully fund the new entity. There were varying opinions on where the remaining funding for the new entity would come from, but one very logical approach was to transition the existing long-dated £ bonds into the new entity. There were two strong arguments to this being a very viable option; firstly, the existing long-dated £ debt in Pru plc would become a less natural fit for what would become a predominantly $-based business. The second reason why we believed that the company may consider such an approach was that Pru plc would likely be over-capitalised following the de-merger, as it would no longer need to be Solvency II compliant.

Any attempt to transition debt from Pru plc to M&G Pru would necessitate a fee under a Liability Management Exercise, or LME. This is essentially what was announced yesterday, when the company officially confirmed its intention to transition the debt to the M&G Pru entity, with bondholders receiving a significant fee in return for approving the change along with increased coupons of more than ½%. We believe this represents a good deal for bondholders and will be voting in favour.

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