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Clearview Subs

Trade Idea: Clearview Subs

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 owns 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, following a non-viability event alongside a significantly weaker credit.

See also the recent piece by the AFR: Could ClearView shares double in six months?

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 — but without noteholder approval.

It is highly likely Crestone will have another go at taking Clearview private, having been invested for almost ten years. Nonetheless, private equity would be more aggressive on Clearview’s balance sheet and increase gearing to maximise 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 Clearview Subs have performed well since issuance, with the margin narrowing from 6% to high 4%. Given the risks on the horizon, it makes sense to lock in the capital return as there is more downside risk (with limited upside) from this point onwards.

Chart 1. Credit Curve Comparables

Source: BondAdviser

Chart 2. Historical Trading Margin of Comparable Securities

Source: BondAdviser

The strategic review was post the FY21 result release and is most likely a result of allowing time for a buyer to approach the company. The embedded value (EV) of Clearview is 96c and most insurance companies get acquired for EV or a premium to EV for growth companies. A takeover in the range of 96c-$1.1 provides an almost 50% increase on the current share price of 65c. But noteholders beware: whilst equity will benefit, noteholders don’t — as a function of having limited rights (i.e. no change of control).

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