Just as an average consumer might do, Aflac said today it will save a chunk of change — roughly $96 million — through a refinancing of $347 million in debt notes that were set to mature in June of this year.
The issuance of two separate sets of notes valued at a total of $750 million, which have been “swapped,” or converted, into lower-rate Japanese yen notes, should also strengthen the Columbus-based firm’s debt rating, said Robin Wilkey, Aflac senior vice president of Investor Relations.
“If you have a bad credit rating, you may be able to get a credit card, but you’re going to pay a lot higher rate,” said Wilkey, likening the financial move to that of a consumer. “But if I have a good credit rating, I can get it for a much lower rate. My options are better.”
New Jersey-based A.M. Best Co., an insurance rating firm, has given both of the Aflac notes a debt rating of “A-” and called their outlook for repayment “stable” based on the supplemental health and life insurer’s strong financial position.
“Aflac’s overall financial leverage is expected to drop back below 25 percent following the repayment of the Samurai notes, while interest coverage should remain in the high teens, driven by the company’s strong operating earnings profile,” A.M. Best said in an investor note.
Aflac said it swapped $400 million in senior notes with an interest rate of 2.65 percent to 30.9 billion in yen notes with a rate of 1.22 percent. They mature in 2017.
Another set of notes, valued at $350 million with a 10-year fixed rate of 4 percent in the U.S., have been converted to 27 billion in yen notes with a rate of 2.07 percent. “It does make sense because it adds to our financial flexibility,” Wilkey said. “It generates a lot of money. It makes sense to be able to do this at this very low interest rate.”
The debt ratings issued by companies such as A.M. Best, Standard & Poor’s and Moody’s all are important, she said, because they allow firms such as Aflac to borrow money at lower rates. Keeping the debt to capitalization ratio under 25 percent also is vital, she said.
“You discuss it with them. There’s sort of an ongoing conversation about how they feel about it,” Wilkey said of the debt-rating agencies. “The last thing we would want to do is issue debt and have them lower our rating.”
Aflac said after paying off the $347 million in notes due this summer, it will use excess cash for “general corporate purposes.” In essence, it goes back into the company’s coffers to use as it pleases.
An obvious advantage to converting the dollar-denominated debt notes to yen notes is that there’s no need to convert them back and worry about the future exchange rates, which can fluctuate back and forth.
“We’re going to pay off that credit with the money that we make in Japan,” Wilkey said. “We earn money in yen in Japan, and we’ll pay off that debt in Japan.”
About 75 percent of Aflac’s net earnings come from insurance policies written in Japan. The insurer posted net earnings, or a profit, of $1.96 billion on total revenue of just more than $22 billion last year.
A.M. Best noted that it plans to keep an eye on the company’s investment portfolio and strategy. Aflac has racked up losses from the sale of investments it made in several European countries, which have been suffering economically.
Aflac shares (Ticker: AFL) slipped 35 cents, or 0.7 percent, to $48.56 in trading today on the New York Stock Exchange. The stock’s 52-week trading range is $31.25 to $59.54 per share.