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March 12, 2012 1:12 pm

Generali cash call conflict could push it to consider hybrids

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Assicurazioni Generali [G IM] might be pushed to consider including hybrid issuance in its capital raising arsenal amid uncertain shareholder support and management opposition to a rights issue, two sources familiar with the situation told dealReporter.

The need for additional capital at Generali is now widely accepted. One of the sources said the Italy-based insurance giant is “not keen on a rights issue” and more significantly there is “no unity among the shareholders on what to do.” The second source agreed on the absence of a consensus. “There are internal conflicts within the management on whether the insurance company needs a rights issue or not. ”

Generali’s current CEO, Giovanni Perissinotto, could be pushing for a cash call, while Alberto Nagel, CEO of Mediobanca, the insurer’s largest shareholder with a 13.4%, wants to wait, the second source said.

The sources said they thought that given the management split and lack of shareholder unity, Generali could be pushed to consider a convertible bond or another Tier 1 instrument to raise its solvency ratio. An ECM banker agreed that the hybrid space is definitely a possibility for Generali. “There are many equity-linked instruments they can do that would be Tier 1-like”.

However, the second source said, Generali has time to consider its options before presenting a plan to shareholders to vote on at the AGM in late April.

In the meantime, Generali will need to gauge market sentiment as rescue rights issues for fellow Italian insurers Fondiaria [FSA IM]/Unipol [UNI IM] move forward. These are expected to come to market after both companies’ EGMs in late March, when shareholders will vote on the issues, the second source said.

Mediobanca may be waiting for the outcome of the Fondiaria/Unipol rights issues before making a call on Generali because it would need to underwrite the cash call, the first source said. As well as being a key investor, like in most Italian cash calls, Mediobanca is most likely to be mandated as lead arranger, a second ECM banker said.

The second ECM banker said that while bankers are anticipating a possible capital-raising transaction from Generali, many are waiting for clarification on how Solvency 2 is going to be applied. It is not yet clear if a grace period will be granted to insurers to reach the required capital requirements.

There could be other complications to a rights issue at Generali. The second ECM banker said that Mediobanca’s participation in a Generali rights issue raises governance issues that again spotlight Italy’s muddled and increasingly expensive share crossholding arrangements. Mediobanca, needs to agree with the company’s other shareholders on whether to maintain the existing governance arrangement at the insurer. The status quo would result in the bank having to deduct its minority stakes in Generali from its regulatory capital base under the new Basel III framework, which comes into effect at the start of next year.

Generali’s capital needs are compounded by its sovereign exposure, regulatory requirements and a potential put option held by its partner in Czech insurer Generali Ppf. Generali’s solvency ratio, 132% at the end of 2010, fell to 118% over the following nine months as the eurozone debt crisis worsened. The insurer is also facing a significant refinancing burden and regulatory pressure to increase capital.

At the end of September last year, Generali had just short of EUR 52bn of Italian government bonds and a further EUR 5.6bn exposure to Spanish government bonds.

Beyond these exposures, Generali has EUR 2.25bn of senior debt due in 2014. These need to be refinanced in less than ideal market conditions and with a backdrop of new higher regulatory capital requirements under the new Solvency 2 framework, currently scheduled to come into force from the beginning of 2014, the second ECM banker said.

In addition, the company would be forced to pay between EUR 2.5bn and EUR 3bn, if its partner in Generali Ppf, Petr Kellner, decides to exercise his put option on the 49% stake he holds in the joint venture. The put that was agreed when the companies entered into the JV in 2008 can be exercised in 2014.

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