AFL AFLAC Inc

Yesterday, Aflac Inc. (AFL) announced the cessation of the earlier announced notes exchange offer, wherein $850 million of notes with interest of 8.5% due 2019 were to be exchanged for new senior notes due 2022. In May this year, rating agency A.M. Best had maintained arating of “a-” on these notes, reflecting a stable outlook.

The closure of the offer was backed by the failure to fulfill the main condition whereby at least $250 million worth notes should be exchanged to honor the exchange offer. However, none of the old notes were exchanged for new ones.

Meanwhile, Aflac’s other senior unsecured notes have been maintained as before. These include notes worth $300 million with interest of 3.45% due 2015, $396 million with interest of 6.90% due 2039 and $448 million carrying interest of 6.45% due 2040. Additionally, the company’s Samurai notes are due in 2012 and Uridashi notes worth $35 billion are due in 2011 while $8 billion notes are due 2016.

Overall, we believe that the termination of the exchange offer should not affect Aflac’s long-term capital strategy.The company already has sufficient fund sources for meeting its debt maturities in 2011. With an estimated financial leverage below 25%, Aflac enjoys a healthy risk-adjusted capital position along with reduced asset impairments.

The company also has the potential to withstand any write-offs in its bond portfolio. Besides, Aflac is on track with the de-risking of its investment portfolio, in order to contract its risk-exposure to European sovereign debt and hybrid securities. Although, some investment losses are apparent in the near term, these factors will accentuate operating and capital leverage in the long run.

Going ahead, Aflac’s strong capital and surplus position is expected to mitigate balance sheet risk and provide liquidity cushion to its long-term growth, while efficiently returning wealth to shareholders.

 
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