March 23, 2013 at 02:39 AM EDT
A Bond Deal Requiring Caution, Completed
A friend of mine told me the price talk for the Fidelity & Guaranty Life Holdings, Inc. bonds was 6.5%, but yield lust must have prevailed, because the coupon was 6.375% when the deal closed. Almost all corporate bonds are priced at a slight discount, so the actual deal yield may have been lower. So much [...]

A friend of mine told me the price talk for the Fidelity & Guaranty Life Holdings, Inc. bonds was 6.5%, but yield lust must have prevailed, because the coupon was 6.375% when the deal closed.  Almost all corporate bonds are priced at a slight discount, so the actual deal yield may have been lower.

So much for my warning.  Anyway, here is the press release:

Harbinger Group Inc. Announces Pricing of Fidelity & Guaranty Life Holdings, Inc.’s $300 Million Senior Notes

NEW YORK–(BUSINESS WIRE)– Harbinger Group Inc. (“HGI”; NYSE: HRG), announced today that its wholly-owned subsidiary, Fidelity & Guaranty Life Holdings, Inc. (“FGL”), priced an offering of $300.0 million aggregate principal amount of its 6.375% senior notes due 2021. The notes were priced at par with a coupon of 6.375%. The notes will mature on April 1, 2021. The offering is expected to close on or about March 27, 2013. FGL expects to use the net proceeds from the issuance of the notes for general corporate purposes, to support the growth of its subsidiary life insurance company and to pay a dividend to HGI.

The notes were offered to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) and to persons outside the United States under Regulation S of the Securities Act.

I got one thing wrong in my initial piece, domestic retail investors could not buy it — it was a 144A deal.  That said, if it has registration rights, it could be resold to retail in the future.

If anyone buying the bonds is reading me, let me suggest a swap for you, while the market is still liquid.  Sell this bond and swap it for the recently issued subordinated bonds of The Hanover Insurance Group.

The Hanover Insurance Group, Inc. (THG) announced that it has priced a registered offering of $175 million of subordinated debentures due March 30, 2053 with a coupon of 6.35%, and redeemable in whole or in part after March 30, 2018 at a redemption price equal to their principal amount.  The debentures are also redeemable in whole, and not in part, before March 30, 2018 in case of specified changes in the tax or rating agency treatment of the debentures. The Hanover plans to use the net proceeds from this offering for general corporate and working capital purposes, which may include repurchases of its common stock.

The yields are almost the same but the risks are far lower on The Hanover Insurance Group’s subordinated debt.  There is no complexity here.  The structure is simple.  It’s a short duration P&C company that has not lost money for the last seven years.  FGLHI may be improved from the past, but it had a really bad past.  Improvement might not be enough for FGLHI.

Risk Summary: Sell complexity, buy simplicity.  Pick up rating. Add duration, drop convexity. Take on the risks of a smaller deal.

I would do this trade in a heartbeat.  It’s not perfect, but I prefer simpler bonds to more complex bonds, unless I am one of the few that understands the complexity.

Full disclosure: I am long the common stock of THG

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