Canadian Imperial Bank of Commerce paid a hefty price this week for a call option - the first ever on a Canadian total loss absorbing capacity bond - raising questions over the logic of the debut trade.
Such options typically come at a cost, but CIBC was thought to have paid above and beyond for being the first Canadian bank to test the waters with the new structure.
The bank priced a US$750m 2.606% four-year non-call three at US Treasuries plus 80bp.
That was some 29bp wide to its legacy 3.5% 2023s, which were trading at 51bp over, and well over CIBC’s only other bail-in-able note, a longer-dated 3.1% 2024, which was being quoted at around 77bp.
The deal also printed with a substantial premium to Bank of Nova Scotia, rated A2/A+/AA-, which came that same day with a US$500m 2.375% four-year bullet at US Treasuries plus 58bp.
CIBC typically trades just 5bp back of Bank of Nova Scotia.
Those levels may have made it tougher for other larger Canadian banks, which were arguably better suited to have debuted this type of structure, say bankers.
“The question is does this data point turn off the other banks?” asked a US banker. “Or do one of the larger banks such as TD or RBC try to tighten it and reset expectations?”
CALL OR NOT TO CALL
Such callable structures are a regular feature in the US, where banks like to redeem bonds early before losing TLAC treatment in the last year of the security’s life.
That way they can avoid paying interest on holdco debt with no regulatory benefit and in turn issue other types of opco bonds that are less costly.
It has been a different story in Canada, where all senior debt issued by banks will be TLAC eligible, leaving little incentive to switch into alternative instruments.
Since Canadian banks do not pay a high premium for holdco debt, there isn’t a huge penalty for holding TLAC issues until maturity, said a source at a Canadian bank.
“Even if it is not TLAC eligible one year inside of maturity, it is still good funding,” the banker said.
CIBC declined to comment about the issue. But some reckon the bank was thinking about using the call to tap cheaper secured funding such as covered bonds.
But other Canadian banks are less inclined to use the structure, especially at the price CIBC paid.
“We haven’t seen the benefit of doing something that is going to cost us 15bp to get the call option when we need the funding anyway when it rolls out of the call option,” the Canadian banker said.
CIBC also seemed to pay a steep price for a 2023 bond that will only qualify for under one year of TLAC eligibility after such rules come into effect in November 2021, said another banker.
That is because the bond no longer qualifies as a TLAC instrument during the last year of its life.
If nothing else the call could provide an insurance policy against issuing in an economic downturn at a higher cost.
“They probably don’t need it, but with the market conditions the way they are it doesn’t cost a lot to issue right now,” said Peter Simon, bank analyst at CreditSights.
“All of that could change and this could be a much more difficult issuance environment before that last year of TLAC eligibility.”