Prudential Raise $1.5B from Notes

Early this week, Prudential Financial Inc. ( PRU - Analyst Report ) vended long-term callable notes worth $1.5 billion. The net proceeds are expected to be utilized for improving the company’s business operations and redeeming retail medium-term notes, which carry higher interest rates.

Accordingly, these long-term fixed-to-floating rate junior subordinated notes are issued at $99.994, while these bear a coupon rate and yield of 5.625%. Particularly, these notes carry a fixed rate until June 15, 2023, after which these may bear a floating interest rate of 392 basis points (bps) over the 3-month LIBOR rate. The notes are callable 50 bps.

The remarketed notes are dated to mature on June 15, 2043. Meanwhile, interest on the notes will be paid semi-annually. The first interest payment is scheduled on June 15, 2013.

Moreover, Prudential has structured these notes in a hybrid format, whereby the company may be able to redeem the new notes anytime after June 15, 2023 or within 90 days once the tax, rating agency and regulatory capital events have occurred.

Prudential appointed Morgan Stanley ( MS - Analyst Report ) , JP Morgan Chase & Co. ( JPM - Analyst Report ) , Credit Suisse AG ( CS - Snapshot Report ) , Barclays Capital Plc ( BCS - Snapshot Report ) , Wells Fargo & Co. ( WFC - Analyst Report ) and Deutsche Bank AG ( DB - Snapshot Report ) as the joint book-running managers for the sale. Both the set of above-mentioned notes are rated “Baa3” by Moody’s Investor Service of Moody’s Corp. ( MCO - Analyst Report ) , “bbb” by A.M. Best and “BBB-” by both Fitch Ratings and Standards & Poor’s (S&P). The outlook remains stable for all.

Ratings Rationale

The ratings from all the agencies validate Prudential’s solid earnings growth and escalated its operational scale on the heels of exceptional operating performance from its diversified business basket and brand appreciation. Moreover, a strong international presence provides the company with better organic growth opportunities and helps garner market share, thereby strengthening its competitive position.

Prudential’s financial leverage ratio is expected to be about 35% for 2012, up from 32% at 2011-end, but slightly down from 36% at the end of September 2012. However, about 2% of the hike in leverage ratio in 2012 is attributable to prepayment of debt and a new accounting standard for deferred acquisition costs, which reduced shareholders’ equity.

Nevertheless, total leverage that includes all operating leverage stood stable at 41% at the end of September 2012 against 42% at 2011-end. Moreover, despite the lingering concerns regarding the low interest rate and economic volatility, Prudential has been successfully maintaining acceptable risk-based adjusted capital (RBC) ratios.

Overall, Prudential could be the apple of the eyes’ of the ratings agencies if it is able to reduce its financial leverage ratio in the mid-20% bandwidth and total leverage below 40%.

Prudential’s stock retains a Zacks #3 Rank, which translates into a short-term Hold rating.