Stockwatch – Royal Bank of Canada has issued $1 billion worth of subordinated debentures in its first Basel III-compliant debt sale, the bank said late last week.
The securities, sold through the lender’s mid-term note program, fall due on 17 July 2024. The non-viable contingent debt, which was also the first sale of its kind for Canada as a whole, carries a fixed annual interest rate of 3.04% to be paid twice a year in the first five years of the debt’s life. After that, holders will receive a floating rate based on the three-month banker’s acceptance rate plus 1.08%. The transaction, for which RBC Capital Markets acted as lead agent, will close on 17 July, the bank said.
The debt provides loss absorption and automatically becomes subject to conversion into common shares in the event of non-viability, with holders receiving a multiplier of the face value of the notes if this happens.
The issue attracted huge demand from investors, prompting the lender to increase the initial amount of $750m it was seeking by $250m, the Financial Post commented.
The borrowing is considered attractive because it is a new source of regulatory-approved financing. RBC’s most recent sale of subordinated debt took place two years ago under a different set of regulations, paying interest of 2.99%.
The new debenture issue was assigned a Baa1(hyb) rating from Moody’s, or two notches below the bank’s adjusted baseline credit assessment and in line with its standard guidance for contractual non-viability subordinated debt.
Baa1 is the eighth highest rating in Moody’s Long-term Corporate Obligation Rating. Obligations rated Baa1 are subject to moderate credit risk. Moody’s states that Baa1 issues “are considered medium grade and as such may possess certain speculative characteristics.” The “(hyb)” indicator is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities firms.
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