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Royal Bank of Canada is testing investor demand for a new type of loonie-denominated debt, which would be eligible for Canadian lenders’ loss-absorbing buffers.
The 60-year securities, which will be callable after five years, will be eligible for the bank’s Additional Tier 1 buffer as it can be converted into common or preferred shares under certain trigger events. They’re being sounded out to investors with a spread around 420 basis points to 460 basis more than government securities, people familiar with the matter said.
The deal will be available for sale to domestic and overseas buyers, according to a presentation sent to regulators in Canada on Wednesday.
“Depending on how well this transaction is received by the market, the other large Canadian banks may implement a similar structure for their future AT1 issuances,” said John Mackerey, a credit ratings analyst at DBRS Morningstar. “These AT1 instruments could attract a larger base of institutional investors in Canada and potentially appeal to investors outside of Canada, allowing the banks to do larger issuances in a cost effective way.”
RBC, Canada’s largest lender by assets, is mulling the sale of this junior subordinated note when investors are assessing the impact of the pandemic on corporate balance sheets. The lender earmarked $2.83 billion in its second fiscal quarter for souring loans, part of the $10.9 billion of provisions set aside by the country’s largest banks to protect themselves from the pandemic’s economic aftermath.
AT1s, the riskiest form of bank debt, have been sold in various denominations in Europe, Asia and the U.S. The securities seek to transfer risk during times of firm-level financial distress to creditors and potentially away from taxpayers.
Canadian lenders have traditionally built those reserves partly by selling preferred shares to retail clients, nonetheless some those instruments are expected to lose eligibility for the banks’ capital buffers.
Canada’s largest banks are expected to issue $9.2 billion of junior capital securities in the coming years to replace notes being phased out, according to Bloomberg Intelligence estimates.
RBC’s new notes will be callable every five years after the fifth year, and are expected to be rated by DBRS at A (low), its seventh-highest investment grade. S&P Global Ratings would rate it BBB, its second lowest investment grade, while Moody’s Investors Services is expected to assign their lowest investment grade, according to separate statements Wednesday.
While there isn’t a direct comparable instrument, smaller rival Bank of Montreal sold US$500 million of 4.8 per cent AT1 perpetual securities in July 2019.
The issuer hasn’t opened books for the transaction, so terms such as pricing can still be changed. It may also opt against coming forward with a debt offering. A press officer at RBC declined to comment.