In a bid to improve its capital structure, Hartford Financial Services Group Inc. (HIG) has announced, in a regulatory filing on Monday, its plan to repurchase the company’s junior subordinated debentures and outstanding warrants from Germany’s largest insurer, Allianz SE. The company intends to spend roughly $2.43 billion toward the same, of which $300 million will be utilized in the repurchase of warrants. These warrants can be used to purchase 69.4 million Hartford shares at an average price of $25.23 per share.
The remaining $2.13 billion will be used to buy back 10% junior subordinated debentures worth $1.75 billion due 2068. The debentures will be bought at $2.08 billion along with the unpaid interest on it. Back in October 2008, the debentures and warrants were issued to Allianz to protect Hartford from a financial crisis.
Hartford intends to complete the repurchases by April 17, 2012, following which, the German insurance giant will be left with only 5% of Hartford’s outstanding shares. The company also plans to issue new senior notes and junior subordinated debt for funding the repurchases, apart from utilizing the share repurchase program for the warrant purchases. This move will thereby reduce the outstanding balance under Hartford’s $500 million share repurchase program to $106 million.
However, the debenture buyback is dependant on the consent of the holders of Hartford’s 6.1% senior notes due 2014. The company had entered a replacement capital covenant at the time of issue of the debentures.
The covenant requires Hartford to raise a portion of the funds used for any repurchase, redemption or repayment of the debentures through the sale of equity or equity-like securities. Thus, in order to repurchase the debentures from the proceeds of a new debt issue, the company is seeking to terminate the covenant.
Consequently, Hartford is seeking the consent of the holders of the senior notes as of March 30, 2012. A successful termination requires the consent of holders of a majority of the total principal value. Holders of the notes who give their consent for the termination before the expiry of the consent solicitation on April 10, 2012, will receive a consent fee of $10 per $1,000 principal value of the notes for which the consent is given. Citigroup Inc. (C) and Goldman Sachs Group Inc. (GS) will act as the solicitor agents for the consent solicitation.
The repurchases are expected to reduce the company’s interest obligations as the new debt will carry a lower interest rate than the debentures. It will also improve the capital structure and increase the company’s financial flexibility.
The announcement was viewed positively by investors as the warrant repurchase will also reduce the risk of share dilution. Consequently, the shares of Hartford rose 4.1% to close at $21.95 on the New York Stock Exchange on Monday.
Currently, the shares of the company carry a Zacks #3 Rank (short-term Hold rating). Considering the fundamentals, we maintain a long-term ‘Neutral’ recommendation on Hartford.
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