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“Implicit” corporate parent support improves ratings
admin | October 26, 2018
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Last week we highlighted the risk to a company’s ratings for what seemed like little more than a basic communication oversight. In that case it was the contrast in the actions on IVZ ratings at S&P (two notch downgrade) vs the affirmed ratings and outlooks by Moody’s and Fitch. How is it possible that three agencies could see the same acquisition in such glaringly different ways? After a number of conversations with investors in the week that followed, it seems the general consensus is that S&P simply made a very big mistake.
Last week Nuveen LLC, the top holding company of the asset manager, issued bonds that are guaranteed by parent TIAA. These bonds not only carry the ‘AA’ ratings that are in-line with the parent ratings, but the stated use of proceeds (UoP) effectively helped to elevate the ratings of what had previously been the issuing entity, Nuveen Finance LLC (aka: NFL, a subsidiary of Nuveen LLC). The stated UoP was to redeem the 2019 NFL bonds, but not the 2024 NFL bonds, which do not carry the parent guarantee. The rationale by Moody’s and S&P in the course of upgrading NFL one notch each to Baa1/A- was that the use of parent-guaranteed funding to swap out of unguaranteed debt reinforced the view of the close integration of Nuveen into the TIAA corporate structure.
Exhibit 1: Asset managers 6-10 year senior debt
Source: Bloomberg, Amherst Pierpont
Relative Value
The new 10-year Nuveen 4.00% ’28 senior bonds (Aa2/AA/AA+) priced October 17th at +90 bp, and most recently were in the +82 bp area. As seen in the graph, those are cheap on a regression line vs peers given the ratings. Additionally, although the ‘28s carry a much better rating and the explicit guarantee from the parent, we think the Nuveen Finance bonds mark a good value too and are 4 years shorter. Those TIAAGL 4.125% ’24 (Baa1/A-/AA-) don’t trade in meaningful volume, but are quoted still in the +120/115 bp area. Perhaps with the upgrade, the wide difference and shorter maturity will generate real buyer interest in the near-term. We think this relationship from Nuveen LLC to NFL shouldn’t be nearly as wide as it is now, and favor the NFL bonds closer to +100 bp area.
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