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Analyst Blog

Yesterday, Lincoln National Corp. (LNC - Analyst Report) offered of senior unsecured notes worth $300 million, according to Thomson Reuters.

Accordingly, these long-term notes are issued at a price of $100.00 and will mature on March 15, 2022.  These callable ten-year fixed rate notes are projected to have a spread of 195 basis points (bps) over the US Treasuries, while bearing a coupon rate of 4.2% and yield rate of 4.2%. Interest on $300 million notes will be payable semi-annually, in equal instalments, commencing from September 15, 2012.

The unsecured notes carry a rating of “Baa2”, “A-” and “BBB+” from Moody’s Investor Service of Moody’s Corp. (MCO - Analyst Report), Standards & Poor’s (S&P) and Fitch Ratings, respectively. Fitch also noted that the outlook for this debt remains stable. Further, Lincoln appointed Credit Suisse AG (CS - Snapshot Report) and Morgan Stanley (MS - Analyst Report) as its joint book-running managers for the sale.

Lincoln expects to utilize the net proceeds to redeem its $300 million worth of senior unsecured notes, bearing interest of 5.65%, ahead of the maturity on August 27, 2012. In December last year, the company had redeemed senior notes worth $250 million that bore interest of 6.20%.  Besides, the latest notes issuance should help lower borrowing costs, thereby aiding the improvement of Lincoln’s financial leverage.

Earnings Review

Lincolnreported fourth quarter operating earnings of $1.00 per share, which came in line with the Zacks Consensus Estimate but higher than 82 cents per share recorded in the prior-year quarter. Meanwhile, operating net income surged 14.0% year over year to $302.6 million.

According to the Zacks Consensus Estimate, the first quarter 2012 earning is currently pegged at 95 cents per share, down about 12% year over year, although two of the 17 analyst firms revised its estimates upwards in the last 30 days, while one downward revision was witnessed. Factoring the ongoing economic volatility, currently the earnings for 2012 is also estimated to reduce by about 4% to $4.00 per share.

Our Take

Overall, Lincoln remains well-capitalized by achieving expanded distribution relationships, improved deposits and net inflows, generating higher ROE and book value. Further, by securing a 5-year credit facility worth $2 billion in June 2011, Lincoln has established a long-term solution to finance its statutory reserves and shore up its life insurance operations, thereby attaining additional capital buffer.

As a result of its strong capital leverage, efficient debt restructuring and sound ratings, Lincoln is poised to consistently return incremental capital to its shareholders. Its comprehensive capital plan is also helping it to mitigate balance sheet risk and provide liquidity cushion to its long-term growth.

However, the near-term outlook remains cautious given the economic volatility, competitive pressures and low interest rate environment, which restrict desired investment income growth. Hence, we maintain a Neutral stance for the long term. Lincoln also carries a Zacks Rank #3, implying a short-term Hold rating.

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