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Arch Capital (ACGL) Offers 3.4635% $1B Senior Unsecured Notes

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Arch Capital Group (ACGL - Free Report) announced the pricing of $1 billion aggregate principal amount of senior unsecured notes. The notes carry an interest rate of 3.635% and are scheduled to mature in 2050.

The company plans to deploy the net proceeds for general corporate purposes.

The company displayed prudence by issuing senior notes amid a low interest rate environment to procure funds and enhance financial flexibility without affecting liquidity. As of Mar 31, 2020, this Zacks Rank #3 (Hold) mortgage insurer had cash and cash equivalents of $882.3 million.

By capitalizing on the low interest rate environment, the company is also attempting to reduce its interest burden, thus facilitating margin expansion. Also, the company’s operational strength should enable it to service debt uninterruptedly, thereby maintaining the stock’s creditworthiness.

However, with the new issuance, interest expense will increase. But we still believe that the company is in a strong position to clear debts, banking on operational efficiencies, largely driven by organic growth.

Though the company’s debt level has increased, Arch Capital has been effectively lowering its leverage ratio over the last four years. However, total debt to total equity was 24.3 as of Mar 31, 2020, which deteriorated 120 basis points from 2019-end but compared favorably with the industry average of 27.9. With the new issuance, leverage will further deteriorate.

Times interest earned, identifying how efficiently the company can service debt, of 11% is much higher than the industry average of 4.3%.

The company’s times interest earned ratio has been improving over the last few years. The improvement in this ratio indicates that the firm will be able to meet its obligations in the near future without any difficulties. At a time when every entity is looking to preserve liquidity as a result of the COVID-19 outbreak, an improving ratio is reassuring for investors.

Recently, some other insurers like Fidelity National Financial (FNF - Free Report) , Radian Group (RDN - Free Report) , and Reinsurance Group of America (RGA - Free Report) issued debt to capitalize on the low interest rate environment. While Radian Group offered 6.625% $525 million senior unsecured notes, Fidelity National offered 3.4% $650 million senior notes.  Reinsurance Group of America offered 3.150% $600 million senior unsecured notes.

Shares of Arch Capital have lost 33.6% year to date compared with the industry's decrease of 19.4%. Nonetheless, strong premium growth, strategic acquisition and a robust capital position should help the stock bounce back.



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