Prudential looks at hybrids to cut AIA cost

A successful subordinated bond sale last month by French insurer AXA illustrated investors' receptivity to subordinated deals from insurers, partly because there have been few issues this year from insurers or banks, partly due to regulatory uncertainty.

Cutting the interest cost would help appease Prudential shareholders, who are wary of approving a $21bn rights issue as part of the wider funding for the insurer's $35.5bn takeover of AIG's Asian insurance business.

Investors fear that Prudential may be paying too much for the assets.

Prudential revamped the debt structure for the acquisition after regulators demanded more capital.

As a result, Prudential had to switch some $5.5bn in cheaper senior debt into $5.4bn of higher-cost hybrid bonds, which have equity-like features and can count towards capital.

This upped the interest cost on this part of the package to 8.5 per cent from 5 per cent, which equates to an extra 110m ($156.8m) a year.

By refinancing all or some of the $5.4bn in the bond markets, Prudential can in theory cut this significantly.

"The AXA deal suggests there would be appetite," said one financial institutions banker.