The acquisition of The Phoenix Companies (NYSE:PNX) by the privately-held Nassau Reinsurance Group was announced on 9/29/2015 and the transaction is expected to close within a few weeks. Nassau will contribute $100 million in fresh equity capital to strengthen Phoenix's balance sheet and position the company for growth. Being a public company is expensive and those costs will be eliminated. PNX stock lost over ¾ of its value in the 9 months prior to the deal announcement as the company struggled with lawsuits, high overhead and adverse mortality rates. PNX shares soared when the acquisition was announced. A stronger private company is also great news for debt holders. Shockingly, the PFX debt issue is selling far less than it was prior to the announcement.
PFX is a par $25 debt issue maturing on 1/15/2032. It has a 7.45% coupon and interest is paid quarterly. At a recent price of $15.58, PFX is trading at a yield to maturity (calculated from my Excel model) of 13.2%. See prospectusfor additional details. PFX may be called at par, but Nassau has not announced plans to do so. The debt will remain publicly traded after Phoenix goes private.
How will going private affect the trading and credit rating of PFX? PFX now trades on the NYSE as an exchange traded debt issue and will move to bond market trading. It is common for private companies to have publicly traded debt. In fact, going private can be very positive for debt holders. For example, Dell Computer's credit rating has improved since it was taken private in 2013 and Dell bonds have traded higher. Nassau is making a $317.2 million investment to acquire PNX shares and inject additional capital. They plan to use Phoenix to grow their U.S. life and annuity business. A.M. best has placed Phoenix under review. An upgrade is expected after the transaction closes and $100 million in equity is added to strengthen the balance sheet. Nassau is backed by Golden Gate Capital, which is a private investment firm that manages over $15 billion.
Should PFX investors fear the move to bond market trading? After the acquisition closes, PFX will be delisted and it will trade by CUSIP (as thousands of other bonds do) on the bond market. While some PFX investors are nervous about the move, the bond market is the preferred trading arena for institutional debt investors. Exchange traded debt issues such as PFX often trade at a discount to comparable debt issues trading on the bond market. See my recent "Prospect Capital And The 10.7% Debt Yield" article for an example of this.
Should debt holders be concerned about getting timely access to financials after Phoenix goes private? As a private company, Phoenix will no longer be required to submit SEC filings. However, it will still provide investors with independently audited financials and disclose material events on a timely basis. Continued reporting requirements are covered in the PFX consent solicitation:
"The Company will satisfy its reporting obligations under Section 704 of the Indenture by delivering to the Trustee:
(1) within one hundred and twenty (120) days following the end of each fiscal year of the Company, the consolidated financial statements of the Company for such year prepared in accordance with generally accepted accounting principles in the United States ("GAAP"), together with a report thereon by the Company's independent auditors (it being understood that the Company shall not be required to include any separate consolidating financial information with respect to the Company, any subsidiary, any joint venture or any other affiliate of the Company, or any separate financial statements or information for the Company, any subsidiary, any joint venture or any other affiliate of the Company),
(2) within sixty (60) days after the end of each of the first three fiscal quarters in each fiscal year of the Company, the condensed consolidated financial statements of the Company for such quarter prepared in accordance with GAAP (it being understood that the Company shall not be required to include any separate consolidating financial information with respect to the Company, any subsidiary, any joint venture or any other affiliate of the Company, or any separate financial statements or information for the Company, any subsidiary, any joint venture or any other affiliate of the Company), and
(3) information substantially similar to the information that would be required to be included in a Current Report on Form 8-K filed with the SEC..."
What is the risk that the acquisition will fail to close? PNX shareholders have already approved the deal and the PFX consent solicitation is in progress. Regulators should be delighted to see a stronger Phoenix with more capital available to cover policy claims. Trading in PNX suggests that the deal is on-track. PNX was trading near $13 before the deal was announced. At a recent price of $36.35, PNX is trading close to the $37.50 cash buyout price.
My newsletter (see additional disclosure below this article) is focused on high yield preferred stock and debt issues. It's unusual to find a double digit yield from an insurance debt issue. Insurance is less cyclical than sectors such as energy, shipping, retail and real estate where most high yield issues are typically found. Phoenix is transitioning from a struggling public company to a well-capitalized growth vehicle for deep-pocketed owner to expand its insurance business. The recent sell-off in PFX is quite surprising given this dramatic improvement in credit quality.
Disclosure: I am/we are long PFX.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Panick Value Research Report subscribers had an advance look at this article. The Panick Report is available in the dividends section of the Seeking Alpha Marketplace.