Return of the NAIC-3?
January 21, 2010
With the buy side no longer running scared from the private placement market, some say risk is the new black. And sources speculate that this renewed confidence in the market might mean the return of the NAIC-3.
“The high yield market has been on fire,” said a sell-side source. Taking their cue from this, some investors may now be open to investing in weak BBB credits or even NAIC-3 companies, he speculated. However, even before the financial crisis, private placements in NAIC-3 companies were few.
Sell-side sources agree some insurance companies could be open to NAIC-3s now because they have cash to deploy. “A weak BBB- with positive momentum” could stand a chance in this environment, one sell-side source said.
The buy side is getting more comfortable with these weaker credits as long as the companies are “structurally sound” and they get the covenants they want, said an industry lawyer. About a year and a half ago, even with covenants, the buy side would go nowhere near such companies.
Most insurance companies prefer investing in NAIC-1 and NAIC-2 companies, buy-side sources agree.
According to data compiled by Private Placement Letter, in 2008, on average NAIC-3 companies accounted for less than 7% to total private placement volume. NIAC-2s accounted for an average of 55% and NAIC-1s were 40%.
Sources from large buy-side firms have said they like to invest in NAIC-3 companies and have historically done so. However, this particular market is rather shallow. In addition to this, NAIC-3 issuance has shrunk in the last decade, said one source in a large buy-side firm. Other sources in insurance companies agree that it is likely BBB credits will see a return to the private placement market.
In 2008, according to a survey done by Private Placement Letter, Prudential and MetLife invested $692 million and $270 million, respectively, in NAIC-3 issuers. During the same year, Mutual of Omaha invested $65 million in NAIC-3 deals, while deploying $142 million in NAIC-1 deals and $362 million in NAIC-2 issues. Advantus Capital Management invested $9 million in NAIC-3 companies, along with $94 million in NAIC-1 deals and $283 million in NAIC-2 deals.
There was little to no demand for NAIC-3 in 2009. Except for a few deals with large insurance companies, on the whole BBB- and NAIC-3 issuers were not able to tap the private placement market.
Even though the comfort level around NAIC-3s is growing, some wonder how fast these deals will get done. One sell-source said he would be surprised to see any NAIC-3 deals take place during the first half of the year.
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