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Aflac CFO Taps Japanese Debt Investors to Bring Down Interest

Costs; The interest-rate differential between the U.S. and other

countries provides finance executives with funding opportunities

By: Nina Trentmann

Date: November 2, 2022

Source: Wall Street Journal

Facing rapidly rising financing costs at home, some U.S. companies with large overseas

businesses are reaping the benefits of lower interest rates abroad. While total debt sales by U.S.

businesses in foreign currencies including the British pound, euro or Japanese yen have fallen

compared with last year at this time—similar to what has happened in the domestic debt

markets—some finance executives continue to tap foreign investors more cheaply as the Federal

Reserve is outpacing many of its central bank peers in rate hikes. The Fed on Wednesday is

expected to raise interest rates by another 0.75 percentage point in what would be its sixth hike

this year.

U.S. companies during the third quarter agreed to an average coupon of 1.5% on internationally

marketed bonds sold in Japanese yen, compared with 3.1% on pound-denominated bonds and

3.3% on bonds denominated in euro, according to Dealogic, a data provider. That is compared

with an average of 5.1% on dollar-denominated bonds sold by U.S. businesses, Dealogic said.

Aflac Inc., a Columbus, Ga.-based insurer, generates about 70% of its revenue in Japan. The

company, which sells supplemental health insurance to Japanese, and less so to U.S. consumers,

recently sold roughly $1.21 billion in debt in Japan, taking advantage of the lower cost of capital

there as the country’s interest rates continue to be in negative territory. CFO Journal spoke to

Chief Financial Officer Max Brodén about the considerations for the transaction and what Aflac

has done with the proceeds. Edited excerpts follow.

✿1. In response to the increase in interest rates by the Federal Reserve, the CFO of Aflac decided the best

option to maintain cash flow is to tap into foreign currencies by issuing their bonds directly to the Japanese

market. By issuing bonds to the Japanese market, AFLAC is taking advantage of the lower cost of capital

as the country’s interest rate continues to be in the negatives in comparison to the United States.

Considering that a large portion of AFLAC’s revenue comes from Japan, yen financing is a more suitable

option for them.

✿ A CFO (a chief financial officer) is a financial professional whose role includes making

recommendations on mergers and acquisitions, obtaining funding, working with department heads to

analyze financial data, and consulting with boards of directors and the CEO on strategy. This role can also

be described as Managerial Finance, a topic heavily discussed in chapter 1. According to the textbook,

“Managerial finance deals with decisions that all firms make concerning their cash flows. The types of

duties encountered in managerial finance range from making decisions about plant expansions to choosing

what types of securities to issue to finance such expansions.” A CFO is the top financial manager in an

organization and reading this article gave me a deeper understanding of their responsibilities and impact.

. ☆ . ° .• °:. *₊° .☆

WSJ: Aflac recently sold about $1.21 billion in debt to Japanese investors. What was the

rationale?

Mr. Brodén: It’s very natural to finance ourselves in yen because we generate a large percent of

our earnings and profits [in Japan]. Our Japan operations hold $24.2 billion of investments. And

we have $5 billion of forwards at the holding company that are long dollars and short yen. So

those increase in value when the yen weakens, and they decrease in value when the yen

strengthens. What we’re talking about here is the assets denominated in yen, where we then issue

our bonds directly into the Japanese market and both the principal and the coupon is nominated

in yen.

WSJ: How did you structure the transaction?

Mr. Brodén: We issued a total of 180 billion yen [equivalent to about $1.21 billion]. It was a

combination of what’s called a term loan A [that usually matures in five to six years] and a yen

bond. We are paying 57 basis points of interest [on the term loan A]. And then we also did a

global yen bond transaction. On that one, we’re paying 137 basis points, so 1.37%. The

combined coupon that we’re paying on these instruments is 89 basis points.

WSJ: What will you do with the proceeds?

Mr. Brodén: We redeemed all our senior notes that we had outstanding. We had $750 million

maturing in 2024 and $450 million maturing in 2025, which combines to a $1.2 billion of

notional debt. We are replacing debt that we were paying 3.49% for with new debt that we’re

paying 0.89% for. When I multiply that differential with the notional, it will save us an

approximate $32 million in interest expense on an annual run rate basis.

WSJ: What’s different when you issue debt in Japan, compared to in the U.S.?

Mr. Brodén: The yen market is not as deep as the U.S. dollar market. That means that sometimes

it can be difficult when you do large issuances to get the demand. When you have market turmoil

and uncertainty, there are times when the market is there for you and there are times when that

window shuts. This is something that we track very, very closely. And we have seen throughout

2022 that for international issuers in Japan, there’s been a slight decrease in demand.

WSJ: Did this impact the way you promoted your offering?

Mr. Brodén: We [made] some changes in the way we structured it. Using a term loan gave us

access to a slightly different market in Japan and we were able to reach bank investors that don’t

necessarily invest in senior notes. So, we broadened out the number of investors that we were

reaching out to, and I was pleasantly surprised by the demand, which then came through in a

lower overall coupon than what we had expected. We sent our treasurer over to Tokyo and

together with our local Japan team, he did three days of face-to-face meetings with investors. I

think that actually made a difference.

WSJ: Do you envisage more transactions like this one going forward?

Mr. Brodén: I definitely see it as part of our tool kit. We don’t have any debt maturing until 2026.

So, we have refinanced both our 2024 and 2025 maturities and those have been redeemed. It

gives us additional flexibility if we want to issue more debt in the near term, even though there

are no such plans at this point.

WSJ: How prepared is Aflac for an economic downturn?

Mr. Brodén: When it comes to capital, that is something that we really manage over the long

term. And we need to be very thoughtful in terms of how much capital we hold, where we hold

it. And we stress test that for multiple different interest and credit environments. Overall, our

capital is not very sensitive to movements in interest rates, but we could be sensitive to some

credit losses if we were to enter into a recession and we would have a significant credit spread

widening or actual realized credit losses in the financial system.

WSJ: European central banks are still lagging the Fed in terms of raising rates. Have you

considered selling debt in euros?

Mr. Brodén: It’s something that we look at from time to time. But, if we were to do a Eurobond,

then we would have to swap it back to U.S. dollars. If you put a swap or a forward on a bond to

synthetically create a U.S. dollar bond where the underlying currency for principal and interest is

in a different currency, like euros, then there will be either mark-to market-movements on that

swap or forward and you may need to meet those margin calls either on a daily basis, monthly or

quarterly. For that, you need to reserve capital. From that standpoint, it tends to not be very

capital efficient for us.

WSJ: So, you try to avoid swapping proceeds into a different currency?

Mr. Brodén: We used to do this in the yen market where we used to actually borrow in U.S.

dollars and swap that to yen to gain that access to that lower interest expense. But we were also

holding significant amounts of capital behind these swaps. And that was actually part of the U.S.

dollar bonds that we now redeemed, these 2024 and 2025 senior notes. By redeeming these and

refinancing them directly, we can actually get rid of the swaps. Then we also release that capital.

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Apollo Posts Net Loss Despite Higher Adjusted Earnings; The

paper losses at the buyout firm’s Athene unit eclipse adjusted

income and fee-related earnings gains

By: Ted Bunker

Date: November 2, 2022

Source: Wall Street Journal

Apollo Global Management Inc. posted its third straight quarterly net loss as rising interest rates

continued to weigh on assets held by its Athene retirement services group.

But third-quarter adjusted net income—or what the firm formerly called distributable earnings—climbed

6.4% to $800.5 million, or $1.33 a share, Apollo said. Fee-related earnings rose almost 14% to $364.6

million, or 61 cents a share.

Investors appeared to focus on operating results as Apollo shares climbed as much as 5.9% in morning

trading following the New York firm’s earnings release.

The $876 million, or $1.52-a-share, net loss for the just-ended quarter extended a pattern of unrealized

losses that began early this year with the inclusion of Athene results for the first time. In last year’s third

quarter, Apollo reported net income of $249.2 million, or $1.01 a share.

Apollo’s Athene retirement services group reported nearly $2.85 billion of investment losses while the

firm’s asset-management operation had a $31 million investment loss for the period. Apollo said its

flagship private-equity investments generated a 0.3% loss.

While market volatility and declining values depressed third quarter results, Apollo executives noted it is

in times like these when the firm has outperformed in the past.

“Now we’ve entered into a particularly favorable backdrop for our investing strategy to shine,” Scott

Kleinman, the firm’s co-president, said during an earnings call with analysts. “We’re on our front foot in a

market that is ripe with opportunities.”

. ☆ . ° .• °:. *₊° .☆

✿2. Apollo Global management Inc have been facing a net loss of $867 million on quarterly for the past

3 years because of market violality, declining value and high interest rates weighing on assets. With a

total loss of $2.85 billion, Apollo’s has been forced to come up with a new strategy to regain their market

investment. The first strategy was to secure $5.2 billion take-private of airfreight company Atlas Air

Worldwide Holdings Inc, which in return boosted up their management fees 16% to $545.9 million from

$472.5. The second strategy was to acquire Griffin Capital Co.’s U.S. asset-management operations,

which heavily benefited apollo by bringing in about $8 billion of assets. Apollo continued to raise capital

through these acquisitions which totaled to 14.3 billion.

✿ This article reminded me of the term “violality” that was mentioned in chapter 1 under the topic of

investment. According to the textbook, rising interest rates and high inflation are causes of market

violality. This relates to Apollo’s Global management experience because they lost millions of dollars due

of market violality brought on by “rising interest rates

“Increased market dislocation is providing many unique opportunities to lean in, creating what we expect

will be a significant tailwind,” Mr. Kleinman added.

He cited the firm’s $5.2 billion take-private of airfreight company Atlas Air Worldwide Holdings Inc. as

an example of when Apollo’s mix of equity capital and credit helped it get the deal done.

Management fees surged 16% to $545.9 million from $472.5 in the year-earlier period, aided by Athene

inflows, investors pouring money into yield funds , or private credit vehicles, and the acquisition of

Griffin Capital Co.’s U.S. asset-management operations. Griffin brought in assets of about $8 billion to

Apollo.

Total revenue firmwide more than doubled to almost $2.98 billion, largely reflecting the addition of

Athene results. Apollo’s asset-management business saw revenue drop 56% to $477 million for the third

quarter compared with nearly $1.08 billion a year earlier.

Mr. Kleinman noted that Apollo continued to raise capital throughout the third quarter, with commitments

to its 10th main investment vehicle reaching $14.5 billion by the end of last month. In early August, the

firm said it had collected $13 billion.

The commitment rate during the just-ended quarter may reflect declines in publicly traded securities

creating imbalances in asset allocations through the so-called denominator effect. Mr. Kleinman indicated

that many institutional investors are grappling with such issues, leading the firm to keep the fund open for

new commitments into the first part of next year, with a goal of raising $25 billion.

Mr. Kleinman also said that the firm began collecting fees on capital in the fund on Oct. 1. Any new

commitments will accrue fees retroactively to that date, he added.

Capital inflows during the third quarter included $6 billion into “the retail annuity channel” at Athene,

Mr. Kleinman said.

“Consumers prefer 4% and 5% guaranteed yields versus 2% and 3% guaranteed yields,” Apollo co-

founder and Chief Executive Marc Rowan said about Athene’s annuities offerings during the call. “The

momentum in the business is overwhelming.”

So far this year, Mr. Rowan said the firm has seen assets from wealthy individual investors rise by $17

billion, putting the firm on track to reach a $50 billion goal by 2026.

In terms of deploying capital, Apollo invested $37 billion over the summer quarter, up 39% from the

year-earlier quarter but down about 7.5% from the second quarter.

Assets under management increased $8 billion from the end of June to reach $523 billion, up 9% from a

year earlier. Uncommitted capital, or dry powder, stood at $51 billion at the end of September. A year

ago, the firm said it had $46.9 billion in dry powder.

Looking ahead, Apollo’s leaders said they anticipate more distress-investing opportunities to arise in the

near term, providing openings where the firm can step in ahead of rivals. Mr. Rowan cited the recent

liability-driven investment, or LDI, crisis in Britain as an example of Apollo seizing the opportunity to

provide liquidity to public pensions.

.

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Broken Deal Triggered Currency Losses for Barclays, Deutsche

Bank and Citigroup; The damage, around $100 million for

Barclays, related to hedges the banks provided on Prosus’ failed

deal for Bill Desk

By: Katherine Blunt

Date: November 2, 2022

Source: Wall Street Journal

Barclays PLC, Deutsche Bank AG and Citigroup Inc. lost money on currency-hedging products

they sold to a client for an acquisition that fell through, the latest example of the damage spread

during the worst stretch for deal making in years.

Prosus NV, best known as the largest investor in Chinese internet giant Tencent Holdings Ltd.,

agreed in August 2021 to acquire India’s Bill Desk , an online payments platform, for 345 billion

rupees, equivalent to about $4.7 billion at the time. To protect the price against swings in the

rupee, Prosus bought derivative contracts from the banks that allowed it to lock in the exchange

rate ahead of the deal’s closure. Prosus had the flexibility to get rid of the hedge for no fee if the

deal didn’t close.

Use of these types of hedging contracts are common in cross-border mergers involving different

currencies. But they can backfire on banks when deals fall apart. That happened last month when

Prosus’ bid expired as the market turmoil dragged down technology-company valuations. The

banks were left exposed to a depreciation of the rupee, according to people familiar with the

deal.

Each of the banks provided $1 billion or more of currency hedges for Prosus, according to

people familiar with the matter. That resulted in losses of about $100 million for Barclays and

$90 million for Deutsche Bank, some of the people said. The Citi loss couldn’t be learned.

✿3. Due to a failed acquisition deal, Barclays PLC, Deutsche Bank AG, and Citigroup Inc lost about

190 million combined on currency heading products. Luckily, one of the largest technology investors in

the Chinese market, Prosus NV, used a derivative contract to protect the price swing. As a result, this

locked the exchange rate, getting rid of the hedge or “risk” in case the deal did not close.

✿ Although chapter 2 focuses primarily on derivatives, chapter 3 provides insight into the relations

between “derivatives” and “hedging”. According to the textbook “individuals, corporations, and

governments use derivatives to hedge risk by offsetting exposures to uncertain price changes in the

future”. This explains what Prosus NV did as the company protected themselves from the risk that

came with an acquisition deal not closing. By locking in the exchange rate ahead of time, Prosus NV

saved themselves from potentially losing millions of dollars. I now understand the importance of

derivative contract because it protected them from underlying market factors.

. ☆ . ° .• °:. *₊° .☆

The size of the losses meant that the banks could absorb them without the need to single them

out in their third-quarter results, according to people familiar with the matter. This is because the

losses are weighed against the banks’ overall profits and revenue, and in that light they are

relatively small and so not deemed to be material.

Banks have been caught off guard this year on deals, a corner of their businesses that generate

hefty fees when times are good but that can generate large losses when the economic landscape

changes.

A collection of investment banks lost more than $600 million on debt backing the purchase of

Citrix Systems Inc., one of the largest U.S. leveraged buyouts of the year after it was sold to

investors at a steep discount in September.

In the marquee deal of the year, Morgan Stanley, Bank of America and Barclays committed to

help finance Elon Musk’s takeover of Twitter Inc. The aim was to sell the debt to bond and loan

fund managers to avoid the risk of holding it on their balance sheets. But current weak demand

for this type of credit has meant the banks need to hold all $13 billion of debt backing the deal to

avoid taking a loss on the holdings.

Barclays lost a chunk of money—about $100 million—from the sale of a similar hedging

product last year, according to people familiar with the matter. It had sold the derivative to

buyout firm Advent International and its partner Singaporean sovereign-wealth fund GIC Pte.

Ltd. to help the bidders hedge their exposure to the Swedish krona as a result of their $8 billion

deal to acquire Swedish Orphan Biovitrum AB, or Sobi, a biotech company.

Advent and GIC withdrew their offer in December. Deutsche Bank and Morgan Stanley also

sold similar contracts to Advent and GIC, losing about $20 million each, according to some of

the people.

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Federal Reserve Chief Tells Markets to Focus on Interest-Rate

Endpoint; But Jerome Powell didn’t detail what will determine the

level of the so-called terminal rate

By: LP Greg

Date: November 2, 2022

Source: Wall Street Journal

Federal Reserve chairman Jerome Powell had one overriding message for markets Wednesday:

Stop obsessing over how fast rates are rising , and start focusing on how high they get.

This was a necessary message, but a discouraging one . That’s because Mr. Powell also said that

the final resting place for the Fed’s interest-rate target—dubbed the “terminal rate”—is going up.

It was also an incomplete message because Mr. Powell didn’t explain what will determine the

terminal rate, leaving open the risk that the Fed will overdo it.

Going into this week’s meeting, markets were hoping for a sign that the Fed, after a fourth

straight 0.75-percentage-point rate increase, might soon pivot to a slower tightening pace, and

perhaps an outright pause. The Fed statement released at 2 p.m. Wednesday suggested it would:

“In determining the pace of future increases…the [Fed] will take into account the cumulative

tightening of monetary policy [and] the lags with which monetary policy affects economic

activity and inflation.”

The resulting jump in stock prices and the fall in bond yields was short lived. Soon after Mr.

Powell started his press conference at 2:30 p.m., he explained that even if rate increases slow,

“we may ultimately move to higher levels than we thought at the September meeting.”

This makes tactical sense. Central banks adhere to the Brainard principle, named for the

economist William Brainard, which says that if you’re unsure how changes in the short-term

interest rate affect the economy, go slowly . Tightening in three-quarter percentage-point

increments made sense when rates were plainly far too low—like taking big strides on familiar

✿4. According to Federal Reserve’s chairman Jerome Powell, the U.S Markets has been facing an

increase in interest rates. Inflation is said to be the cause of this sudden spike and the market hopes

the fed will “pivot to a slower tightening pace or even an outright pause” to bring down the rates. In

detail, the market suggests the fed tightens monetary policy and find out how it affects economic

activity. In order to implement this strategy, nominal rates need to go above inflation.

✿ I found this article similar to chapter 5 regarding the topic of the Federal Reserve. The Federal

Reserve represents the central banking system of the United States. According to the textbook, the

primary function of the Fed is to direct the monetary policy of the United States. Doing this

effectively promote the goals of maximum employment, stable prices, and moderate long-term

interest. This article shows me a real-life example of a circumstance where this action needs to take

place. In this situation, the FED will have to slow down monetary policy to bring down interest rates.

. ☆ . ° .• °:. *₊° .☆

terrain. But the higher rates get, the less certain the impact becomes. Downshifting to quarter or

half-point increments gives the Fed more time to assess that impact, just as small steps in an

unfamiliar place makes a wrong turn less likely.

This also makes strategic sense because the ultimate impact of monetary policy on growth and

inflation depends on th