Clearview Wholesale Subordinated Notes Update
These notes have performed well and we would advise investors to consider redeploying capital into other safer risk/return opportunities which do not have the overriding negative takeover risk. The discount margin has narrowed following the widening that occurred in late 2021, providing a better exit point for investors.
After the recent FY21 result release late August 2021, the Board has placed a ‘For Sale’ sign up on the group as part of a strategy review. This includes a potential change of control transaction. The change of direction has been somewhat motivated by Crestone Capital Partners (private equity), who own 17% of the shareholder base.
While this may be a good course of action for shareholders and they may gain upside on their shares, noteholders are likely to lose out if a transaction goes ahead. The risk here is noteholders could be left with highly illiquid ordinary equity after a conversion in a significantly weaker credit.
Because there is no change of control protection in the documentation, our advice for noteholders would be to consider and exit the Clearview subs. If a change of control occurs with a private buyer, the note terms allow the buyer to be substituted as the issuer with APRA’s approval and without noteholder approval. It is highly likely Crestone will have another go at taking Clearview private, having been invested for almost ten years.
Private equity would be more aggressive on Clearview’s balance sheet and increase gearing to maximise the return on equity. This would leave noteholders with a relatively weaker credit and recovery profile. Furthermore, transparency would be decreased as unlisted companies have lower disclosure requirements versus listed entities under ASX listing guidelines.
The formal review process has now commenced, with Bank of America (BoA) hired as advisor. The embedded value (EV) of Clearview is close to 100c and most insurance companies get acquired for EV or some premium to EV (if they’re growth companies). A takeover in the range of AUD1-1.50 would represent a 33-50% increase on the current share price of 75c (May 2022). But noteholders beware: whilst equity will benefit, noteholders don’t – as a function of having limited rights via a change of control.
Terms of the Notes
- AUD75m not listed on the ASX
- Contribute to Tier 2 Capital of the APRA Regulated subsidiary (ClearView Life Assurance Limited)
- Unsecured and subordinated
- Distributions are non-discretionary and cumulative, but subject to a solvency condition
- Margin of 6% p.a. above 3m BBSW, payable quarterly in arrears
- First optional call date is 5 November 2025 with legal final maturity of 5 November 2030
- Subject to a non-viability trigger
- No change of control protection
