North America Financial Bond: Toronto-Dominion Bank's US$1.75bn AT1

IFR Awards 2022
2 min read
Sunny Oh

Over the border
Toronto-Dominion Bank came across the border in October to issue its first ever Additional Tier 1 capital instrument in the Yankee market.

The US$1.75bn AT1 instrument was especially important to TD, as it helped it replenish its capital stock after it announced two big acquisitions: a US$13.4bn all-cash deal for commercial bank First Horizon, based in Memphis, Tennessee, and a US$1.3bn deal for New York brokerage Cowen.

The problem for TD was that AT1 deals issued in the US market in the autumn were trading wider in the secondary market as Treasury yields rose.

“Each new trade was resetting the market and resetting it wider,” said Edward Arden, group head of financial institutions at TD. “Investors felt a bit that they were catching a falling knife.”

There was a narrow window of market stability in October, however, with TD seeing US$3.5bn in demand for this rare issuer of regulatory capital in the US.

Amid worries around the extension risk of AT1 instruments with low back-end spreads, the lofty coupon offered by the highly rated Canadian bank also helped to draw investor appetite.

Bookrunners TD Securities, Citigroup, Goldman Sachs, Santander, Societe Generale and Wells Fargo priced the 60-year non-call five bond at 8.125%, in from price thoughts in the 8.5% area.

TD issued the new US dollar AT1 notes in what is called a limited recourse capital note – a regulatory format permitted in Canada that gives the banks certain tax advantages, while restricting investor recourse in the event of a bank failure.

Before TD's offering, only Bank of Nova Scotia had issued the LRCN structure in US dollars.

The novelty of the LRCN structure in US dollars and the lack of liquidity around that single Bank of Nova Scotia dollar deal made for a very narrow pool of comparable bonds.

Yet despite US investors being unfamiliar with the format, they made up almost all the demand. That was a testament to the deal’s successful marketing effort that could help pave the way for other Canadian lenders to use the structure.

Still, the LRCN format had its advantages. “The advent of these new structures opens it up to a different investor audience,” said Cameron Joynt, vice-president of enterprise capital, funding and liquidity at TD. “It allows us to do size like the US$1.75bn, which is in a completely different zip code from some of the other AT1s that we've done before.”

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