Aflac Raises $450M from Notes - Analyst Blog

By Zacks | September 26, 2012 AAA

Recently, Aflac Inc. (AFL) announced the sale of long-term subordinated notes worth $450 million, thereby inflating it from the initial plan to issue notes worth $250 million. Additionally, a green shoe provision gives the company an option to increase the current size by 15% or $67.5 million. Accordingly, the $450 million 40-year junior subordinated notes are issued at a price of $100.00 each, bearing both - a coupon rate and a yield of 5.5%. These notes are dated to mature on September 15, 2052. Interest on the notes will be paid semi-annually, in equal instalments, with the first pay dated on December 15, 2012.

The amount of the proceeds is expected to inject ample liquidity by utilizing funds for general corporate and capital purposes. Meanwhile, Aflac appointed Morgan Stanley (MS), JP Morgan Chase & Co. (JPM), Wells Fargo & Co. (WFC) and Goldman Sachs Group Inc. (GS) as the joint book-running managers for the sale. The above-mentioned set of notes carry a rating of "Baa1", "bbb+" and "BBB" from Moody's Investor Service of Moody's Corp. (MCO), A.M. Best Co. and Standard & Poor's (S&P), respectively.

Further, the rating agencies are contented with Aflac's debt structure, since following the latest notes sale, the company's financial leverage is expected to be around 25% and its interest coverage is projected be over 10x. Moreover, these $450 million notes can be redeemed any time after September 2017 or once the tax event has taken place. The outlook of most ratings agencies remains stable.

However, S&P cast a negative outlook on Aflac's credibility, based on the negative sovereign rating in Japan. All the ratings agencies have also showcased concern regarding the mounting impairment losses within the company's investment portfolio. This also hampers the desired earnings growth.

Nevertheless, these ratings agencies have backed Aflac's consistent sales growth in the U.S. and Japan, particularly from individual guaranteed-renewable health and accident insurance coupled with life insurance. Moreover, the company's strong capital and surplus cash position is expected to mitigate balance-sheet risks and provide liquidity cushion in the long run, as well as return value to shareholders consistently. Hence, we continue to retain our long-term Neutral stance on the stock, with a Zacks Rank #3, implying a short-term Hold rating.

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