Phoenix May Go to Capital Markets as Solvency II Sparks Deals

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Phoenix Group Holdings may be gearing up to borrow in the capital markets as it prepares to buy up businesses that companies could put up for sale to meet more stringent financial rules.

The U.K.’s biggest manager of closed life insurance funds, which cut the cost of its bank debt after winning an investment grade ranking from Fitch Ratings Ltd. earlier this month, said Thursday it expects lenders to provide cheaper capital.

“The market has taken the news of the current Fitch rating favorably,” Finance Director James McConville said in a telephone interview. “If we were to come to the market again we would have more confidence in raising money at lower rates. It opens up a wider pool of investors.”

The award of investment grade caps a four-year effort by Chief Executive Officer Clive Bannister to reduce costs and refinance debt at Jersey-based Phoenix after the 5 billion-pound purchase of Resolution Plc in 2007. Bannister joins Royal London Group’s CEO Phil Loney who is also ready to snap up businesses as the Solvency II rules, which come into effect in January, force insurers to hold extra capital against some assets.

Phoenix has 780 million pounds ($1.2 billion) of bank debt and has sold 728 million pounds of senior and subordinated bonds.

The firm has been in talks with ratings companies to provide it with an investment grade ranking since last year to improve access to borrowing and accelerate dealmaking. It has also hired Moody’s Investors Service and Standard & Poor’s.

Bannister said the firm wants to buy closed life businesses “but there’s been a period of hiatus ahead of Solvency II.”

“It’s extremely difficult for an acquirer to price an asset if we don’t know the capital test which is going to be visited on the industry,” he said on the call. “That inhibitor will disappear by the year-end and there will be more activity.”

New Chairman

There is more than 250 billion pounds of closed life businesses in the U.K. potentially up for grabs, Bannister said earlier this year.

The insurer, which also named Henry Staunton to replace Howard Davies as chairman in September, said it is confident it will be well-capitalized under new regime after submitting its internal model to regulators in June. The Bank of England is expected to reveal its findings for the industry in December.

Phoenix reported Thursday 110 million pounds of cash generation in the first half and an operating profit of 135 million pounds. That’s down from 266 million pounds a year earlier.

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