TIAA-CREF's Announcement
On April 14, 2014, TIAA-CREF issued a press release announcing its agreement to acquire Nuveen Investments, Inc., a diversified investment management company, for $6.25 billion. Nuveen has more than $200 billion in assets under management, and will operate as a separate subsidiary within TIAA-CREF's asset management business. The transaction is expected to close by the end of 2014.
Moody's Reaction
On April 14, Moody's Investors Service issued a press release announcing it had placed its Aaa ratings of TIAA and TIAA-CREF Life on review for downgrade. Here is the first paragraph of Moody's ratings rationale:
Moody's said that the review for downgrade of TIAA's ratings is driven by the size and scope of the announced acquisition. The acquisition of the much lower-rated asset manager Nuveen, given the substantial size of the transaction, combined with the likelihood of accompanying leverage (either operating or financial), places downward pressure on TIAA's credit profile. Although asset management is a complementary business, the rating agency said the planned acquisition of Nuveen is outside of the core higher-education pension business of TIAA, which is the foundation of its Aaa rating. Such a large acquisition outside of its core business, if completed, may not be consistent with Moody's expectations for TIAA's Aaa rating. If and when the acquisition closes, Moody's will likely downgrade TIAA's IFS [insurance financial strength] rating [one notch] to Aa1 from Aaa, and its affiliated ratings by one notch.
On August 19, Moody's issued a press release reiterating its concerns about the transaction. Moody's also indicated it had placed its B3 rating of Nuveen on review for upgrade.
Other Rating Firms' Reactions
On April 14, Standard & Poor's (S&P) issued a press release indicating that its AA+ ratings of TIAA and TIAA-CREF Life were not affected by the transaction. In August 2011, S&P had lowered its rating of U.S. debt one notch from AAA to AA+ and consequently had lowered the ratings of all its top-rated insurance companies from AAA to AA+.
On April 14, Fitch Ratings issued a press release indicating that its AAA ratings of TIAA and TIAA-CREF Life were not affected by the transaction. On April 15, A. M. Beat issued a press release indicating that its A++ ratings of the two companies were not affected.
TIAA's Surplus Notes
In the lead article in the August 2010 issue of The Insurance Forum, I deplored the issuance of surplus notes by TIAA and The Northwestern Mutual Life Insurance Company. They were the last two holdouts against the tidal wave of surplus notes issued by financially strong life insurance companies following what I called the "revolution of 1993" prompted by The Prudential Insurance Company of America.
In December 2009, TIAA issued $2 billion of 30-year surplus notes at an annual interest rate of 6.85 percent. Moody's, in accordance with its practice of rating surplus notes two notches below the financial strength ratings of highly-rated issuers, rated the surplus notes Aa2.
On September 15, 2014, TIAA issued another $2 billion of surplus notes—$1.65 billion of 30-year surplus notes at an annual interest rate of 4.90 percent and $350 million of 40-year surplus notes at an annual fixed-to-floating interest rate of 4.375 percent. The net proceeds of the new surplus notes are intended to fund a portion of the cost of the acquisition of Nuveen and for general corporate purposes.
On September 15, Moody's issued a press release saying that it had rated the new surplus notes Aa2, and that the 2014 surplus notes and the 2010 surplus notes are on review for downgrade along with the Aaa ratings of TIAA and TIAA-CREF Life. Moody's indicated the 2014 surplus notes and the 2010 surplus notes, in terms of subordination, rank the same.
General Observations
Moody's said its Aaa ratings of TIAA and TIAA-CREF Life, and its Aa2 ratings of the surplus notes could be affirmed if the Nuveen acquisition is not completed, but likely will be lowered one notch if the transaction is completed. I have no recollection of ever seeing such a threat by a rating firm. Also, it appears there is a difference of opinion among the rating firms about the implications of the transaction, although S&P had already downgraded its ratings of the two TIAA companies by one notch in the wake of its 2011 downgrade of U.S. debt. After the transaction is completed, which seems likely, it will be interesting to see the effect Nuveen has on the operations of TIAA-CREF.
Although TIAA now has far more surplus notes outstanding than any other insurance company, the rating firms do not seem concerned. Perhaps their reasoning is that TIAA's surplus notes still represent only a small proportion of the company's capital. Nonetheless, I am uncomfortable that TIAA now has $4 billion of surplus notes outstanding.
I am offering a complimentary seven-page PDF consisting of my three-page August 2010 article about surplus notes and Moody's four-page September 15 press release. Send an e-mail to jmbelth@gmail.com and ask for the TIAA package.
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Email: jmbelth@gmail.com
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