XLIT Ltd.#s Proposed Subordinated Debt Assigned #BBB# Issue-Level Rating

Stocks and Financial Services Press Releases Friday June 23, 2017 09:23
TORONTO--23 Jun--S&P Global Ratings

TORONTO (S&P Global Ratings) June 22, 2017--S&P Global Ratings today said it assigned its 'BBB' issue-level rating to XLIT Ltd.'s (A-/Positive/--) proposed fixed-to-floating-rate subordinated notes. XLIT is a Cayman Islands intermediate insurance holding company of XL Group Ltd. based in Bermuda (NYSE:XL), a global property-casualty re/insurer.

The rating on the subordinated notes is linked to the issuer credit rating on XLIT but is lower by two notches to reflect the subordination of bondholders to policyholders' obligations and the interest-deferral features of the issue.

The notes will be euro-denominated and will have a 30-year tenor with a 10-year call option. We anticipate that the notes will qualify as Tier 2 ancillary capital under the relevant rules of the Bermuda Monetary Authority. XL plans to use the proceeds primarily to replace a similar-size portion of floating-rate preferred shares outstanding (U.S. dollar-denominated), for which it has already floated a tender offer, helping lock in low interest rates on a portion of its hybrids. Thus, we expect the group's financial leverage to be unchanged with neutral-to-slight benefit to fixed-charge coverage on a pro forma basis.

The notes are subordinated to the claims for all senior creditors (this includes any unsubordinated creditors of the issuer and policyholders' claims). XL can call these notes at year 10 and on any distribution payment date thereafter, subject to the conditions of repayment, including approval from the insurance regulator. In addition, XL can call for an early redemption at par for regulatory, tax, and rating agency reasons and at make whole for certain corporate events. If not called at the first call date, the coupon will reset to a floating interest rate with interest set at immaterial 25 basis points over the initial credit spread, plus the relevant reference benchmark rate. XL has an option to defer interest payments on the notes under certain conditions as well as interest deferral is mandatory if a solvency event has occurred (measured per its group solvency capital levels).

We expect to classify the notes as having intermediate equity content under our hybrid capital criteria. We include securities of this nature, up to a certain limit, in our calculation of total adjusted capital, which forms the basis of our consolidated risk-based capital analysis of insurance companies. We view the issuance of subordinated debt and tender of existing securities as an economic trade and with a view to manage interest rate and foreign exchange risk.

Furthermore, we expect that the new hybrid issuance along with the existing hybrids will remain a long-term feature of XL's capital structure. XL has demonstrated its commitment to the permanence of hybrids in its capital structure to support its risk-based capital adequacy and issuance of these subordinated notes in our view serves as a replacement capital for those being tendered.

Therefore, we continue to view the existing hybrids subject to tender offer (series D, series E, and legacy Catlin preferred shares) as having intermediate equity content.

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