Loonie taking its cues from broader economic picture: Market strategist
Toronto-Dominion Bank raised $1.75 billion (US$1.39 billion) in its inaugural sale of limited recourse capital notes, taking advantage of the fast growing market for the Canadian dollar-denominated hybrid securities first sold one year ago.
Toronto-Dominion, Canada’s largest bank by assets, priced the transaction Thursday at the tight end of guidance after drawing orders covering the offering by more than two times its size, people familiar with the matter said. Over 60 investors took part in the sale, they added. A press officer for the lender declined to comment.
The deal comes a day after Canadian insurer Great-West Lifeco Inc. said it aims to raise almost one-third of the US$3.55 billion it’s paying for Prudential Financial Inc.’s retirement business in the U.S. by issuing loonie-denominated limited recourse capital notes, or LRCNs.
Canadian banks and insurance companies have issued at least $11.9 billion (US$9.5 billion) of LRCNs since July 2020 when Royal Bank of Canada opened the market by selling $1.75 billion of 60-year notes which can be called after five years, Bloomberg-compiled data show. The securities, which are eligible for the financial institutions’ loss-absorbing buffers, allow issuers tax deductions on interest payments -- thus reducing their all-in borrowing costs.
“The market is comfortable in buying in size,” John van Boxmeer, a senior research analyst for global fixed income at CIBC Asset Management Inc., said Wednesday in an interview. The attractive coupons amid historically low yields are “part of the equation” supporting the demand, he said.
A potential Great-West 60-year LRCN offering callable after five years would have a coupon of around 3.6 per cent if issued at this time, said Boxmeer. The transaction would be used to refinance a bridge loan provided by a Canadian bank, a representative of Great-West said in an emailed reply to questions. The company hasn’t announced the arrangers for a deal.
A Great-West sale of LRCNs would follow offerings from rivals such as Sun Life Financial Inc. and Manulife Financial Corp. earlier this year.
In June, Sun Life priced $1 billion of LRCNs to yield 3.6 per cent after getting an order book of around four times the deal amount, people familiar with the sale said at the time. The securities are quoted at a yield of 3.47 per cent, according to Bloomberg bid prices Wednesday. In February, Manulife also priced $2 billion of the notes.
While the market for LRCNs is rapidly expanding and already accounts for roughly 10 per cent of the yearly issuance of Canadian dollar-denominated corporate bonds, it’s still at an early stage, said Boxmeer. That’s partly because investors first need to see how the market reacts should some of the instruments not be called after five years, meaning their duration would be significantly extended, he said. Such events in other markets have prompted a pickup in volatility.
“It’s possible that it might be called in five years’ time, but its also very possible that this could be a 60-year or perpetual instrument” under certain circumstances, said Boxmeer. “We’re very conscious of that and I think the market is as well.”