What is the expected impact of retiring the $500 million of 4.5% senior unsecured debt on CNA’s balance sheet and leverage ratios?
Short‑answer
Retiring the $500 million of 4.5 % senior unsecured notes will wipe out an existing liability of the same size, while the $500 million 5.2 % senior unsecured notes that are being issued will replace it. The net‑debt balance on CNA’s balance sheet therefore stays roughly the same, but the composition of the debt changes – a short‑‑term, lower‑‑coupon liability is swapped for a longer‑‑dated, higher‑‑coupon liability. The immediate balance‑sheet impact is a modest boost to cash (or cash‑equivalents) that is offset by the new note liability, leaving equity unchanged. The key downstream effects on leverage ratios are:
| Ratio | Expected direction | Reasoning |
|---|---|---|
| Total‑Debt‑to‑Equity (or Debt‑to‑Capital) | Neutral to slightly higher | Total debt stays at $500 M (old debt removed, new debt added). The higher coupon (5.2 % vs 4.5 %) raises interest expense, which can modestly erode earnings and therefore raise the debt‑to‑EBIT or debt‑to‑EBITDA ratio. |
| Debt‑to‑EBITDA (or Debt‑to‑Operating‑Income) | Slightly higher | Same principal amount, but the annual interest cost rises from $22.5 M (4.5 % × $500 M) to $26.0 M (5.2 % × $500 M). If EBITDA does not increase proportionally, the ratio will move upward. |
| Leverage (Debt/Assets) | Neutral | Assets rise by the cash received from the issuance and fall by the same amount when the old notes are retired; net assets are unchanged, so the debt‑to‑assets ratio remains roughly constant. |
| Liquidity (Current Ratio, Quick Ratio) | Improves | The $500 M of 4.5 % notes being retired is a short‑term liability (often classified as a current liability). By replacing it with a 15‑year term note, CNA shifts a sizable current‑liability out of the “current” bucket, thereby raising the current‑ratio and quick‑ratio even though total assets and total liabilities are unchanged. |
| Weighted‑Average Maturity of Debt | Longer | The new 2035 maturity pushes the average maturity out several years, which is viewed positively by rating agencies and can lower the “refinancing‑risk” component of leverage. |
| Interest‑Coverage Ratio (EBIT/Interest) | Worse | Interest expense climbs by about $3.5 M per year, so unless operating earnings increase, the coverage ratio will decline. |
1. Balance‑sheet mechanics
| Item | Before transaction | After transaction | Net change |
|---|---|---|---|
| Cash (or cash‑equivalents) | X | X + $500 M (from note issuance) – $500 M (used to retire old notes) | ≈ 0 |
| Current liabilities (short‑term debt) | Includes $500 M of 4.5 % notes | No 4.5 % notes; the $500 M 5.2 % notes are recorded as long‑term debt | – $500 M (current) |
| Long‑term liabilities | Existing long‑term debt (Y) | Y + $500 M (new 5.2 % notes) | + $500 M |
| Total liabilities | = Current + Long‑term | Same total amount ($500 M) | ≈ 0 |
| Equity | Unchanged | Unchanged (no net profit/loss on the transaction) | 0 |
Result: Total debt stays at roughly $500 million; cash and equity are unchanged; the debt profile shifts from a short‑term, lower‑coupon liability to a longer‑term, higher‑coupon liability.
2. Why the leverage ratios move the way they do
Debt‑to‑Equity / Debt‑to‑Capital – Because the principal amount of debt does not change, the ratio is essentially flat. However, leverage ratios that use earnings (e.g., Debt‑to‑EBITDA) are sensitive to the cost of debt. The coupon increase from 4.5 % to 5.2 % raises annual interest expense by about $3.5 million (≈ 15 % higher). If EBITDA remains static, the denominator of the ratio (EBITDA) is unchanged while the numerator (debt) is unchanged, so the ratio will edge upward.
Debt‑to‑EBITDA (or Debt‑to‑Operating‑Income) – Same logic as above: higher interest reduces net operating income, nudging the ratio higher.
Debt‑to‑Assets – Assets rise by the cash inflow and fall by the same amount when the old notes are retired, leaving net assets unchanged. Hence the ratio is neutral.
Liquidity ratios (Current Ratio, Quick Ratio) – The $500 M of 4.5 % notes is a current liability (it must be repaid or refinanced within the next year). By swapping it for a 15‑year note, CNA removes a large current‑liability, thereby increasing the current‑assets/current‑liabilities ratio even though total assets and total liabilities are unchanged. This is a genuine improvement in short‑term liquidity.
Weighted‑Average Maturity – The new 2035 maturity (≈ 15 years from issuance) replaces a note that would have been due in the near‑term (likely 2026‑2028). The average maturity of CNA’s debt portfolio therefore extends, reducing refinancing risk and often leading rating agencies to view the capital structure as more stable.
Interest‑Coverage Ratio – Because the coupon rises, the annual interest cost climbs from $22.5 M to $26.0 M. Unless operating earnings increase, the EBIT/Interest ratio will fall, indicating a tighter cushion for meeting interest obligations.
3. Strategic take‑aways for CNA
| Point | Implication |
|---|---|
| Liquidity | The move improves the current‑ratio and quick‑ratio, giving the company a stronger short‑term balance‑sheet profile and more flexibility to fund operations or pursue opportunistic investments. |
| Refinancing risk | By pushing a sizable $500 M of debt out to 2035, CNA reduces the need to refinance a large chunk of its obligations in the next 1‑3 years, which is especially valuable in a potentially volatile credit‑market environment. |
| Cost of capital | The higher coupon (5.2 % vs 4.5 %) raises the effective cost of debt. This will modestly compress profitability and could slightly worsen leverage‑related ratios that use earnings. Management will need to offset the higher interest expense through either higher underwriting margins, cost‑saving initiatives, or organic earnings growth. |
| Rating outlook | AM Best already gave the new notes a “bbb+” rating with a positive outlook, indicating that the agency believes the longer‑dated, higher‑coupon issuance is acceptable given the improved maturity profile and the company’s overall creditworthiness. The positive outlook suggests that, despite the higher interest cost, the net effect on credit metrics is viewed as neutral‑to‑beneficial. |
| Capital‑structure flexibility | Because the total debt amount is unchanged, CNA retains the same leverage cushion for future balance‑sheet maneuvers (e.g., acquisitions, share‑repurchases). However, any future debt‑raising will now be layered on top of a higher‑cost base, so the company may be more selective about additional leverage. |
4. Bottom line
- Balance‑sheet impact: Cash rises temporarily, but the same amount of cash is used to retire the old notes, leaving net cash and equity unchanged. Total liabilities stay at $500 million, but the liability shifts from a short‑term, 4.5 % note to a long‑term, 5.2 % note.
- Liquidity: Improves because a large current liability is removed.
- Leverage ratios: Debt‑to‑Equity and Debt‑to‑Assets remain essentially flat; Debt‑to‑EBITDA (or Debt‑to‑Operating‑Income) and interest‑coverage ratios will likely worsen slightly due to the higher coupon, while the longer maturity reduces refinancing risk and can be viewed positively by rating agencies.
- Strategic effect: The transaction trades a modestly lower‑cost, short‑dated liability for a higher‑cost, long‑dated one, improving balance‑sheet stability and liquidity at the expense of a small uptick in interest expense and a marginally weaker earnings‑based leverage metric.