RT1 redemptions - a trend is your friend

This Wednesday was an important day for the Restricted Tier 1 (RT1) asset class.

Phoenix Group (Phoenix), a UK-based insurer mostly in the savings and pensions business, announced a tender offer at par for up to $500m of its $750m 5.625% RT1 callable in January 2025, and $350m Tier 2 callable in June 2026. At the same time, Phoenix issued $500m in a new RT1 security at an 8.5% coupon (BBB+ rated). Since the inception of the RT1 market, we have received plenty of questions from investors around our expectations for RT1s calls, but it was difficult to point to any tangible examples of benchmark size deals considering the first one due to get called was the Phoenix RT1 in January 2025. We note that a £300m RT1 redemption by Just Group, a UK financial services group specialising in retirement products and services, also took place in late 2021, but we would argue that the circumstances at that time made this event less likely to be viewed as a trend-setter for the asset class. Instead, we think this week’s developments are notable for the RT1 space for several reasons.

Firstly, we believe that consistent track record of redeeming perpetual capital instruments - be it RT1s or Additional Tier 1s (AT1s) - at their first call date has a positive impact on the spreads in the asset class in the medium term. Indeed, we have argued in the past that this is exactly what we expect to see for AT1s in the coming years, and why we see this asset class outperforming other credit alternatives - our most recent note on this topic was published in February. 

Secondly, in fairness a single redemption (leaving aside Just Group) by an individual issuer can hardly represent a trend for the broader asset class (a little over €20bn in European RT1s outstanding across euro, US dollar and sterling). Still, the actions of Phoenix will inevitably be considered by other insurance firms when taking decisions around their redemptions. We have seen this behaviour develop already in AT1s and we believe the RT1 space will not be any different. In this respect, we would note that insurance firms’ liabilities (mostly insurance policies) are less sensitive to headline risk than those of banks (deposits and wholesale funding), and so a non-call arguably creates less reputational risk. However, European insurance firms still carry approximately 20-30% leverage and access to debt markets remains an important component of capital optimisation for all RT1 issuers. 

Thirdly, the new security is being issued at a level which implies a 15 basis point premium to the existing RT1. The new bond was issued with an 8.5% coupon, while, had Phoenix not called the existing bond, the coupon would have reset from 5.625% to 8.35%. While this is not necessarily that material, it is worth noting that the new issue is not strictly economical, speaking purely from a spread perspective (and the associated issuance costs). This means other considerations have played a role in refinancing the existing transaction.

Finally, we would also note that the $500m redemption (via tender at par) is coming in over six months ahead of the scheduled call date. This removes further uncertainty around the call, and demonstrates a proactive approach from Phoenix towards its debt capital instruments. Again, it is still too early to argue that this will become a trend, but inevitably Phoenix’s approach lays out a clear example of prudent debt capital management, which other peers may follow.

All in all, we reiterate our view that consistent track record of capital instrument redemptions will lead to excess returns for this asset class versus other credit alternatives in the coming years. We welcome the developments from Phoenix this week, and expect further redemptions at first call date in this space in the coming years.