RBC prepares to blaze trail with new bail-in eligible bonds

Bloomberg

Royal Bank of Canada is getting ready to sell the country’s first bail-in eligible senior securities.
The bank held a call with fixed-income investors to discuss the legal framework for the securities, according to people who had access to the call.
Canadian lenders will be able to start issuing the new securities after September 23, when the bail-in framework is officially put in place. Bank representatives didn’t respond to requests for comment made after business hours.
RBC, Canada’s second-biggest bank, was long seen as the lender that would first offer the new securities because it’s historically been a trend setter for new types of securities in the Canadian bond market. As the country was getting its banking system compliant with Basel III regulations, RBC was first to sell non-viable contingent capital preferred shares in January 2014. A few months later it also sold the market’s first NVCC subordinated debt.
The bail-in regime has been in the works since 2013 when the Canadian government first said it would take steps to manage the risks of banks labeled “systemically important” by the country’s banking watchdog, the Office of the Superintendent of Financial Institutions.
Regulators worldwide have been working to prevent a repeat of the 2008 financial crisis, which saw developed nations recapitalise failing lenders with taxpayer money to keep them from further harming the economy — only to face a backlash from taxpayers.
The bail-in eligible securities are riskier than deposit notes because they can be converted into equity in case a bank gets into trouble.
They will gradually replace deposit notes, the cheap and versatile source of funding for Canadian banks that’s become the backbone for the country’s corporate bond market.
A lot of questions about the new bail-in securities remain unanswered. It’s unclear how much interest, or spread over federal government bonds, banks will have to offer investors in exchange for taking on more risk than associated with deposit notes.
In most recent deposit note sales from, Toronto-Dominion Bank reopened its March 2021 notes at a spread of 64 basis points, while Canadian Imperial Bank of Commerce sold three-year notes at a spread of 72 basis points.
“My estimate was about 15 to 20 basis points over deposit notes, but banks argue it should be 5 to 10 basis points, because of how investor-friendly Canada’s bail-in regime is,” said Himanshu Bakshi, a Bloomberg Intelligence credit analyst.