Monday, 22 October 2018

Canada Capital Markets Issue: Toronto-Dominion Bank’s US$1.5bn contingent capital bond

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The right callable

Banks around the globe spent much of the past year trying to reduce the cost of complying with tougher new capital requirements.

Canada’s Toronto-Dominion Bank found one way to do so with a US$1.5bn callable Tier 2 contingent capital bond.

It was the first time a Canadian issuer had ever sold callable subordinated debt denominated in US dollars.

The 15-year non-call 10 structure found tremendous demand from investors, garnering some US$10.5bn of orders from buyers across Asia, Europe and the United States.

The deal surely got some help from a positive backdrop, pricing in September when the market was in the middle of a significant rally.

Yet callable trades have never been especially popular in the US, which has long been seen as a bullet-only market.

TD might well have opted to go with a 10-year bullet as well, but that would have accrued a lower capital benefit for the bank, while costing only a tiny bit less.

And previous TLAC deals from JP Morgan and Citigroup had opened the way for TD to try a new approach.

“Until recent months, there was no chance of doing callable Tier 2 in the US because of investor push-back,” said Edward Arden, head of FIG origination at TD Securities. “[The TLAC deals] really provided the catalyst to show this deal could work.”

And work it did, as the bookrunners – TD Securities, Goldman Sachs, JP Morgan and Wells Fargo – were able to ratchet in levels more than 30bp from initial price thoughts to price the deal at Treasuries plus 205bp.

As one investor put it at the time: “This basically got priced as a 10-year with a little bit of spread for the optionality.”

While there is a risk to investors that TD does not call the bond after 10 years, the bank does have a strong incentive to do so.

Capital benefits diminish in the years before maturity, losing 20% of Tier 2 capital treatment per annum in the final five years of a bond’s life under Basel III regulations.

“The US market never really believed in the moral obligation to call,” said a DCM banker away from the deal.

“TD is the right name to enter the market with this structure. It’s rated Single A, which is helpful for a lot of investors that would otherwise have walked away from it.”

In the end, US-based investors bought more than three-quarters of the issue, showing that the market was now ready to embrace callable deals in a way it had never done before.

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