Paul Harris discusses TD Bank
Toronto-Dominion Bank plans to sell US$1.75 billion of loss-absorbing junior securities just as all-in yields of bank bonds stabilize near their highest in more than a decade.
The Canadian lender is on track to price 60-year bonds that are callable after five years at a yield of 8.125 per cent, lower than around 8.5 per cent earlier discussed, according to people with knowledge of the matter. The securities, known as limited recourse capital notes, are eligible for the Canadian banks’ Additional Tier 1 reserve buffers and are expected to be rated at the second lowest investment grade by S&P Global Ratings and one step higher by Moody’s Investors Service.
The yield of a Bloomberg index grouping BBB rated dollar-denominated bonds issued by banks was at 6.26 per cent Wednesday, down from 6.31 per cent reached Sept. 27, the highest level since 2010 as the financial stability came into greater focus. TD went ahead with the deal as it’s expanding its footprint in U.S. retail banking and institutional capital markets by completing its acquisitions of brokerage Cowen Inc. and First Horizon Corp.
“TD is one of the most conservative and highest-rated names in the sector, and lower-quality issuers could certainly have to pay 9 per cent or more to issue AT1s in this environment” said Peter Simon, a New York-based analyst at CreditSights Inc. “It is unusual to see a yield over 8 per cent for a name as strong as TD, but we think that’s more a function of the rate environment and volatility in the curve rather than fundamental concerns about TD.”
RISKIEST BANK DEBT
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.
“The purpose of the issuance is to build TD’s AT1 capital base to optimize its capital structure, particularly with its deals for First Horizon and Cowen still pending,” Simon said in a note to investors Thursday. “We see very good value in the LRCNs considering TD’s fundamental strengths.”
LRCNs allow issuers tax deductions on interest payments -- thus reducing their all-in borrowing costs. Under certain events, the notes can be converted into preferred shares, and ultimately into common equity.
“I think they are trying to secure their most expensive funding now likely because they expect rates to go up even higher from here,” said Himanshu Bakshi, a New York-based analyst at Bloomberg Intelligence.
Canada’s larger banks led by Royal Bank of Canada started to sell the securities in 2020 after the Office of the Superintendent of Financial Institutions deemed the securities eligible as Additional Tier 1 loss-absorbing buffers.
Since then, a vast majority of the transactions have been priced in the Canadian dollar debt market, while Bank of Nova Scotia has been the only company to sell the debt in U.S. dollars. Toronto-based Scotiabank last year sold US$600 million of 60-year notes callable after five years at a yield of 3.625 per cent.
A TD representative didn’t provide a comment.