DBRS has today placed the Non-Cumulative Class A 1st Preferred Shares, Series M and Non-Cumulative Class A 1st Preferred Shares, Series M (collectively, the Convertible Preferred Securities) ratings of The Toronto-Dominion Bank (TD or the Bank) Under Review with Negative Implications. The Convertible Preferred Securities are convertible to common equity at the issuer’s option. Today’s actions apply only to the Convertible Preferred Shares that DBRS rates; all other preferred share ratings of the Bank are unaffected.
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Our review will consider the changing Canadian regulatory landscape as it relates to resolution mechanisms, the ability of the issuer to convert the preferred shares into common equity and the expected losses incurred as a result of the conversion. Additionally, the review will incorporate whether convertible preferred securities will have wider notching, based on the global standard notching for preferred shares, because of additional risk associated with conversion. As guidance, subordinated debt non-viability contingent capital will likely be rated no higher than the standard rating for preferred shares and the preferred share non-viability contingent capital will likely be rated one notch below the standard rating for preferred shares.For clarity, global standard notching for preferred shares means the starting point for notching preferred share ratings is the intrinsic assessment (IA) rating rather than the final senior debt rating, and the degree of notching from the IA rating to the preferred share rating widens to reflect our perception of the increased risk in these capital instruments. The base notching policy is three notches for AA, four notches for “A” and five notches for BBB and lower IA ratings. Note that when DBRS implemented the changes in the preferred share methodology, on June 29, 2009, to increase the base notching at even the strongest rating categories and the expansion of the base notching as the credit quality of the bank migrates downward, most banks in Canada had their preferred share ratings downgraded to only one notch above the global standard notching for preferred shares.
The language for the other issues is similar, if not identical, so I’ll only quote the first paragraph of each press release.
DBRS has today placed the Non-Cumulative First Preferred Shares, Series W (the Convertible Preferred Security) of Royal Bank of Canada (RBC or the Bank) Under-Review with Negative Implications. The Convertible Preferred Security is convertible to common equity at the issuer’s option. Today’s action applies only to the Convertible Preferred Security that DBRS rates; all other preferred share ratings of the Bank are unaffected.
DBRS has today placed the ratings of the Non-Cumulative Class A Preferred Shares, Series 26 , Non-Cumulative Class A Preferred Shares, Series 27 and Non-Cumulative Class A Preferred Shares, Series 29 (collectively, the Convertible Preferred Securities) of Canadian Imperial Bank of Commerce (CIBC or the Bank) Under Review with Negative Implications. The Convertible Preferred Securities are convertible to common equity at the issuer’s option. Today’s actions apply only to the Convertible Preferred Securities that DBRS rates; all other preferred share ratings of the Bank are unaffected.
BMO.PR.V (which rarely gets mentioned on PrefBlog because it’s US Funds):
DBRS has today placed the Non-Cumulative Perpetual Class B Preferred Shares, Series 10 (the Convertible Preferred Security) rating of Bank of Montreal (BMO or the Bank) Under Review with Negative Implications. The Convertible Preferred Security is convertible to common equity at the issuer’s option. Today’s action applies only to the Convertible Preferred Security that DBRS rates; all other preferred share ratings of the Bank are unaffected.
Update, 2011-8-18: DBRS is holding a teleconference:
DBRS will be holding a teleconference at 10.30 a.m. today to discuss its recent rating actions on Canadian banks’ non-cumulative preferred shares. Yesterday, DBRS placed various non-cumulative preferred shares of Bank of Montreal, Canadian Imperial Bank of Commerce, Royal Bank of Canada and The Toronto-Dominion Bank Under Review with Negative Implications following the review of the Office of the Superintendent of Financial Institutions Canada (OSFI) Advisory on Non-Viability Contingent Capital, issued on August 16, 2011 (NVCC Advisory).
The rating actions follow the revision of how DBRS views the elevated risk of conversion in an environment where OSFI is encouraging Canadian banks to put in place resolution mechanisms, including the release of the NVCC Advisory, and the regulator’s ongoing push toward loss absorption from capital instruments, including convertible preferred securities, to generate common equity prior to the declaration of non-viability by OSFI. On conversion, there is the potential for the holder of this instrument to incur losses.
The teleconference, hosted by Brenda Lum, Managing Director, and Robert Long, Senior Vice President, will cover the key analytical considerations in the DBRS rating action and allow for a question-and-answer period
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A replay will be available immediately after the teleconference until September 1, 2011, at the following numbers:REPLAY CALL-IN DETAILS
Available until 11:59 p.m. on September 1, 2011
Telephone: +1 905 694 9451 or toll-free at +1 800 408 3053
Pass Code: 5608110DBRS will also publish a full transcript of the teleconference by the end of business on August 19, 2011. The transcript will be available at www.dbrs.com or by contacting us at info@dbrs.com
Update, 2011-8-22: DBRS released a minor correction to the TD release:
In the DBRS press release published on August 17, 2011, in which DBRS placed the Non-Cumulative Class A 1st Preferred Shares, Series M and Non-Cumulative Class A 1st Preferred Shares, Series N ratings of The Toronto-Dominion Bank Under Review with Negative Implications, the first paragraph referred to only the Series M. The press release has been corrected below and is available at www.dbrs.com or by contacting us at info@dbrs.com
[…] Note that S&P does not discriminate between RY.PR.W and the other issues, even though RY.PR.W has a potential NVCC clause. […]
RY.PR.W is the last remaining of the pre NVCC issues that can possibly qualify for NVCC status. RBC will likely seek NVCC for RY.PR.W IMHO. Now this is where things get interesting. The trigger will be identical as RY.PR.O or RY.PR.N (which also have the same exact dividend per year) but the conversion clause is really different! 30 days notice, and a floor price of 2.50$ instead of 5.00$. This means all the dilution of all the the other NVCC conversions would already be done by the time this issue would convert so it’s much more likely IMHO you’d receive full payment of 25$ in the form of shares. Or at least a much higher amount. What do you think of my logic here?
You are quite right:
SEDARRoyal Bank of Canada Jan 21 2005 17:26:11 ET Final short form prospectus – English PDF 213 K” [the regulators do not allow me to link to the prospectus directly, as that would make life too easy for retail scum]
This means all the dilution of all the the other NVCC conversions would already be done by the time this issue would convert so it’s much more likely IMHO you’d receive full payment of 25$ in the form of shares. Or at least a much higher amount.
I believe that all NVCC conversions of preferred shares will be done simultaneously; it is bail-in debt that might be converted afterwards [possibly after cancellation of pre-existing common], if I understand the terms of the discussion paper correctly.
So if the share price used for conversion was between $2.50 and $5.00, RY.PR.W will be paid [in common shares] in full, while other preferred shareholders will get less than their par value in stock.
And if the common price is less than $2.50, RY.PR.W holders will have the consolation that they’re getting twice the recovery that other preferred shareholders are getting.
One thing to consider is: will the bank ask for NVCC status for RY.PR.W? And if asked, will OSFI give it to them, given this wrinkle? I’m surprised that NVCC status hasn’t been asked for already, frankly.