S&P Affirms Aviva’s ‘A-‘ Long-term Debt Rating

October 1, 2003

Standard & Poor’s Ratings Services announced that it has affirmed its ‘A-‘ long-term debt rating on the U.K. insurer Aviva’s £1.6 billion-equivalent ($2.66 billion) junior subordinated bond issue.

“The rating on the notes reflects the subordinated status of bondholders relative to senior creditors of Aviva, and the interest deferral features of the bond issue,” said S1P credit analyst Mark Button. “The strong demand from investors enabled Aviva to raise more funds than planned (originally GBP1.2 billion equivalent), providing Aviva with additional flexibility to support its organic growth and manage its capital position.”

S&P said, “The notes consist of three tranches: GBP800 million [$1.332 billion]of 6.125% fixed-rate perpetual reset subordinated notes; EUR500 million [$583 million]of 5.70% fixed- to floating-rate perpetual subordinated notes; and EUR650 million [$758 million] of 5.25% fixed- to floating-rate subordinated notes due 2023. All three tranches contain call features. The first call dates on the notes are: Oct. 2, 2013, on the euro dated notes; Sept. 29, 2015, on the euro undated notes; and Sept. 29, 2022, on the sterling undated notes.”

The rating agency indicated it expected the notes “to remain a long-term feature of Aviva’s capital structure,” and that they are “subordinated in payment and in liquidation to senior creditors, and give management sufficient flexibility to defer interest payments in times of financial stress without causing an event of default. The optional deferral triggers are (1) nonpayment of dividends or interest on pari passu or junior-ranking securities and (2) regulatory intervention.

“The perpetual notes are junior in liquidation and in payment to all Aviva’s dated subordinated notes, although Standard & Poor’s expects Aviva to treat all junior subordinated creditors equally in payment of interest.”

S&P also said that although the notes are hybrid securities, and exceed its normal tolerance limit of 15 percent, producing a “high leverage,” this “is mitigated by the investment of a large part of the proceeds in low-risk assets at CGU International Insurance PLC (AA-/Stable/A-1+) and the expected increase in shareholder funds via retained earnings.”

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