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