American Financial Group, Inc. (AFG) announced the offering of 6.25% $150 million Subordinated Debentures that are slated to mature in 2054.
The company intends to deploy the net proceeds from the offering for general corporate purposes including buyback of shares and the partial or complete redemption of 7% Senior Notes worth $132 million. These Senior Notes are due Sep 2050 but are redeemable from Sep 30, 2015 on par.
Additionally, American Financial intends to list its debentures in the New York Stock Exchange with the symbol AFGE. The company’s Debentures trading on the New York Stock Exchange will expectedly start within 30 days of American Financial’s first issue, provided it receives approval for listing.
At the end of second-quarter 2014, American Financial had a total debt of $912 million, improving marginally from 2013-end. As of Jun 30, 2014, the debt-to-capital ratio for the company was 0.15x, representing an improvement of 110 basis points (bps) from 2013-end level. However, with the present offering of debentures of $150 million, American Financial’s debt-to-capital will deteriorate by 210 bps.
Although American Financial’s interest expense decreased to $17 million from $18 million in the year-ago quarter, the latest offering will likely increase the same going forward. However, it seems a prudent decision to capitalize on the current soft interest rate environment to issue debts at lower coupon rate and deploying the proceeds to redeem debts of higher coupon rate.
Nevertheless, the property and casualty insurer’s solid operational performance generates enough funds to service the debt uninterruptedly. Its bottom line has been continuously improving. The company has also surpassed expectations in the trailing four quarters with an average beat of 6.25%.
Currently, American Financial holds a Zacks Rank #2 (Buy). Better-ranked stocks that are worth reckoning in the same industry include AmTrust Financial Services, Inc. (AFSI), Federated National Holding Company (FNHC) and Mercury General Corporation (MCY). All these sport a Zacks Rank #1 (Strong Buy).
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