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Rating Action:

Moody’s assigns (P)A2 and (P)A3 ratings to Prudential’s new Senior Unsecured and Subordinated MTN program

15 April 2020


London , April 15, 2020

Moody's Investors Service (Moody's) has today assigned a provisional (P)A2 senior unsecured and a provisional (P)A3 subordinated Medium Term Notes (MTN) program ratings to a program established by Prudential Public Limited Company ("Prudential", A2 senior unsecured, negative outlook).

Ratings on potential individual notes issued under the programme will be subject to Moody's review of the terms and conditions of the notes.

RATINGS RATIONALE

Prudential's (P)A2 senior unsecured MTN and (P)A3 subordinated MTN ratings are in line with the group's existing A2 senior unsecured debt and A3(hyb) subordinated ratings, respectively, and in line with Moody's notching practices for diversified insurance groups. Moody's says that these ratings reflect (i) the combined financial strength of the operations that the group owns, notably its Asian and US operations, (ii) a well-diversified set of cash flows from these operations; and (iii) the instrument's relative rankings in the event of the winding-up of the group.

According to the draft Terms and Conditions of the MTN program, the senior notes would rank pari passu with all other non-subordinated obligations of Prudential, but would be junior to policyholder claims. Conversely, subordinated notes would be junior to senior creditors but would rank at least pari passu to other subordinated obligations, including the group's legacy Tier 2 instruments, which were issued to qualify as Tier 2 capital under the European Solvency II regime.

Moody's notes that with regard to the subordinated instruments, Prudential may, or may not, specify in the applicable Final Terms that the notes are subject to "Optional Interest Deferral". If the notes do include an optional coupon skip mechanism, this may result in some equity credit under Moody's debt equity continuum, based on the notes' maturity, interest deferral features, and subordination.

Prudential's intends, for all the notes issued under this MTN program, to qualify as regulatory Tier 2 Capital of the group under the Hong Kong group-wide supervisory (GWS) Framework when it comes into force. In the case of senior unsecured notes, to quality for Tier 2 capital treatment, Moody's understands that the group would need to down-stream the proceeds into an insurance operating company and appropriately track and monitor their use. In all other respects, Moody's believes there is no fundamental difference between senior unsecured instruments which qualify as Tier 2 capital under the GWS Framework and all other outstanding, or future, senior unsecured notes.

With regard to regulatory capital, the GWS Framework remains subject to further consultation and the Hong Kong legislative process is currently expected to be implemented in the second half of 2020 at the earliest. Consequently, the features to qualify as Tier 2 Capital are not yet fully known. Whilst Prudential has prepared the terms and conditions of its MTN program based on preliminary indications from the Hong Kong Insurance Authority (HKIA), the final content and application of the rules may differ from the group's expectations. As such, there remains a significant risk that the notes do not fulfil the relevant final regulatory criteria, and therefore are not classed as Tier 2 Capital for the Group.

NEGATIVE OUTLOOK

Prudential carries a negative outlook, reflecting the diminished diversification benefits following the planned completion of the planned disposal of a minority stake in the group's US operating subsidiaries, including Jackson National Life Insurance Company and Jackson National Life Insurance Company of New York (collectively Jackson, A1 insurance financial strength rating, ratings under review)as well as uncertainty regarding the importance of the US operations to Prudential group in the longer-term.

Prudential currently owns 100% of Jackson. On 11 March 2020, Prudential announced that it has commenced preparations for a minority initial public offering (IPO) of Jackson. The rating agency therefore expects the group to continue to benefit from diversified earnings, cash-flows and dividends for at least over the coming 12-18 months.

The negative outlook also reflects some uncertainty related to the ultimate level of capitalisation and leverage at the Group following the IPO, although the Rating Agency expects them to remain consistent with the current rating level, as well as the legal structure of the holding company post transaction. Moody's also continues to monitor developments in the GWS Framework by the HKIA.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Factors that could lead to a downgrade of Prudential's ratings include: (1) a meaningful reduction in geographical diversification; (2) a deterioration in the Asian operations' credit profile, reflected in a substantial deterioration in earnings generating ability; (3) a material fall in the group's capitalization as a result of the planned IPO transaction; (4) an increase in adjusted financial leverage to over 30% or earnings coverage falling below 8x on a long-term basis.

Given the negative outlook on Prudential's ratings, it is not likely the ratings will be upgraded in the near term. However, the following could stabilize the outlook: (1) the continued diversification and growth in the earnings generating ability of the Asian operations; (2) robust group capitalization following the introduction of the HKIA group-wide supervisory framework; and (3) earnings coverage consistently above 8x with adjusted financial leverage below 30%.

The following ratings were assigned:

Issuer: Prudential Public Limited Company

..Assignment:

....Senior Unsecured Medium-Term Note Program, assigned (P)A2

....Subordinate Medium-Term Note Program, assigned (P)A3

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Life Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187348 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004 .

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569 .

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Helena Kingsley-Tomkins
VP-Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London
United Kingdom
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

Antonello Aquino
Associate Managing Director
Financial Institutions Group
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

Releasing Office :
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London, E14 5FA
United Kingdom
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

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