Prudential Financial's (PRU) Subordinated Notes Get Rated

Prudential Financial Inc.’s (NYSE:PRU) 4.50% fixed-to-floating rate junior subordinated notes worth $750 million have recently received rating action from credit rating agencies. These subordinated debts are scheduled to mature by 2047.

While A.M. Best assigned the Long-Term Issue Credit Rating (Long-Term IR) of “bbb”, Moody’s Investors Service, a wing of Moody’s Corporation, assigned a Baa2 rating. The outlook is stable for the ratings assigned by both the rating giants.

Prudential (LON:PRU) intends to utilize the proceeds to refinance an 8.9% junior subordinated note issue worth $600 million that is scheduled to mature before 2018. The funds will also be utilized to repay, partly, medium-term notes as well as for general corporate purposes.

The approach by Prudential to capitalize on the still-low interest rate environment to procure funds appears prudent. Also, this might lower the interest burden on borrowings, facilitating margin expansion.

The company exited the last-reported quarter with its debt balance rising 1.2% from the 2016-end level. Long-term debt to equity ratio was 0.36, up 30 basis points. With the new issuance, the long-term debt-to-equity ratio would improve by 2 basis points.

The company’s long-term credit rating reflects robust operating performance in its key business segments along with diversified earnings and strong liquidity position. According to A.M. Best, the company has always resorted to utilizing a significant amount of debts. The recent issuance would increase the existing amount of debts.

Moody’s also stated that Baa1 senior as well as A1 insurance financial strength rating of its U.S. life insurance operating companies are driven by the group’s solid market position and leading presence in the pension risk-transfer market. However, these positives are weighed on by the company’s size despite various initiatives to simply the structure and improve leverage. Nonetheless, the rating agency stated that even after the new issuance, leverage will remain within its guidelines.

Moody’s stated that the ratings could be upgraded if the total debt-equity ratio is below 30%, Prudential Insurance Company of America (PICA) is upgraded or if there is an increase in cash flows available to the holding company, if the RBC is at least 400% and dividends from non U.S. life insurance subsidiaries account for a higher percentage of holding company cash flows.

Similarly, the rating agency stated that the ratings could be subject to downgrade if there is a decline in the credit profile of its Japanese operations, total debts surge 40%, consolidated GAAP earnings coverage plunges 6x and cash coverage plunges less than 3x on a consistent basis or if there an increase in transactions by the subsidiaries that might deteriorate the quality of regulatory capital.

Rating affirmations or upgrades from credit rating agencies have always played a significant role in retaining investors’ confidence as well as in exhibiting the credit worthiness of the companies. Whereas, rating downgrades reflect companies’ deteriorating finances and high debt levels, which raise the cost of further debt issuances. These ratings of Prudential Financial will not only help it boost investors’ confidence but will also enable it to fulfill various capital needs.

Zacks Rank and Share Price Movement

Prudential Financial carries a Zacks Rank #3 (Hold). Shares of the company have gained 28.4% in a year’s time, slightly underperforming the Zacks Investment Research

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Written By: Zacks Investment Research