Several banks turned to the US dollar market in 2018 to raise cash for regulatory capital for the first time, but the US$1.8bn bail-in bond from Royal Bank of Canada stood out among them all.
The inaugural deal was the first from a Canadian issuer in the US dollar market, and was announced shortly after the new Canadian bail-in regime came into effect on September 23.
RBC had sold a Canadian dollar-denominated bail-in deal the week prior, but it was the US dollar transaction that was really expected to serve as a benchmark for pricing in other currencies.
So getting the execution right really mattered.
“Out of all the new bail-in regimes, Canada was the big one because it’s the highest quality jurisdiction and its banks trade closest to US regional banks,” said Laura Drumm, head of FIG DCM for RBC in New York.
“There was heightened focus around whether or not the market would charge as much as it had been charging the European banks, who had been doing their debut bail-in deals at around 20bp to 30bp.”
RBC sold a US$300m five-year floating-rate note issue that was priced at three-month Libor plus 66bp, and US$1.5bn of five-year fixed-rate bonds priced at Treasuries plus 78bp, which was much tighter than initial price thoughts of Treasuries plus low 90s.
The final pricing indicated a bail-in premium of just 10bp.
“That was by far the tightest premium compared to some of its high-quality peers in other jurisdictions,” said Peter Aherne, head of North America capital markets at Citigroup.
But it wasn’t clear that kind of pricing was achievable from the get-go, as both rating agencies and investors were not fully aware of the distinctions between the Canadian bail-in framework and those in other countries.
Canada’s is more investor-friendly because of a “no creditor worse off” policy. Canada’s Deposit Insurance Corp will compensate investors if they incur greater losses than under a liquidation scenario. Bail-in debt holders would rank pari passu with depositors for the purposes of the liquidity calculation.
“We had a good story to tell,” said David Power, head of term funding and capital management for RBC’s treasury group.
“But we became a bit alarmed in our first meetings in the US, as investors had clearly not yet understood how the Canadian regime was differentiated from those of other jurisdictions.”
In order to get the buyside up to speed, RBC ramped up efforts to meet with investors across the US – a move that ultimately paid off.
Bank of America Merrill Lynch, Citigroup, Goldman Sachs, Morgan Stanley and Royal Bank of Canada were bookrunners on the deal.