PrefBlog

LB.PR.F is a FixedReset, 4.00%+260, announced October 11. This issue will be tracked by HIMIPref™ but relegated to Scraps on credit concerns.

The prospectus supplement (SEDAR, October 11, 2012) contains some interesting wrinkles on the Non-Viability Contingent Capital (NVCC) theme:

Under the new Basel III rules, effective January 1, 2013, all non-common Tier 1 and Tier 2 capital instruments issued by a bank must have, either in their contractual terms and conditions or by way of statute in the issuer’s home country, a clause requiring a full and permanent conversion into common shares of such bank upon certain trigger events at the point where such bank is determined to be no longer viable. The Preferred Shares Series 11 as a result will not qualify as non-common Tier 1 capital under the new capital rules as no such conversion mechanism exists. As a result, the Bank may, with the prior approval of the Superintendent, redeem the Preferred Shares Series 11 in accordance with their terms. See “Risk Factors”.
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The Basel Committee on Banking Supervision has announced new international bank capital adequacy rules (commonly called Basel III) which will amend the existing Basel II capital management framework. The Office of the Superintendent of Financial Institutions of Canada (“OSFI”) has announced that it plans to adopt the new Basel III rules for purposes of Canadian bank capital guidelines. Under the new Basel III rules, effective January 1, 2013, all non-common Tier 1 and Tier 2 capital instruments issued by a bank must have, either in their contractual terms and conditions or by way of statute in the issuer’s home country, a clause requiring a full and permanent conversion into common shares of such bank upon certain trigger events at the point where such bank is determined to be no longer viable. The Preferred Shares Series 11 and, if and when issued, the Preferred Shares Series 12 as a result will not qualify as non-common Tier 1 capital under the new capital rules as no such conversion mechanism exists. For purposes of being included in the Bank’s regulatory capital under the new capital rules, the Preferred Shares Series 11 and the Preferred Shares Series 12 would be phased out beginning January 31, 2013 (their recognition will be capped at 90% of total Tier 1 capital from January 1, 2013, with the cap reducing by 10% in each subsequent year). As a result, the Bank may, with the prior approval of the Superintendent, redeem the Preferred Shares Series 11 and the Preferred Shares Series 12, if any, in accordance with their respective terms. If prevailing rates are lower at the time of redemption, a purchaser would not be able to reinvest the redemption proceeds in a comparable security at an effective yield as high as the yields on the Preferred Shares Series 11 or the Preferred Shares Series 12 being redeemed. The Bank’s redemption right may also adversely impact a purchaser’s ability to sell Preferred Shares Series 11 and Preferred Shares Series 12 as the optional redemption date or period approaches.

The 2011 Annual Report (complete with slogan “Our team – It’s (sic) Capital” on the front cover) states:

The BCBS published further details in January 2011 with regard to qualifying criteria for capital under the guidelines. OSFI subsequently provided additional guidance regarding the treatment of non-qualifying capital instruments in February 2011. As a result, certain capital instruments will no longer qualify fully as capital beginning January 1, 2013. The Bank’s
non-common capital instruments will be considered non-qualifying capital instruments under Basel III and will therefore be subject to a 10% phase-out per year beginning in 2013. These non-common capital instruments include both Series 9 and 10 preferred shares and Series 2010-1 subordinated Medium Term Notes. The Bank has not issued any hybrids or innovative Tier 1 instruments and none of its capital instruments are subject to a regulatory event redemption clause. Therefore, no regulatory event redemption is expected.

What are the Series 2010-1 sub MTNs? I’m glad you asked that:

On November 2, 2010, the Bank issued $250.0 million Series 2010-1 Medium Term Notes (Subordinated Indebtedness), for net proceeds of $248.4 million. The contractual maturity of the Series 2010-1 Medium Term Notes is November 2, 2020. Holders of the Series 2010-1 Medium Term Notes are entitled to receive semi-annually fixed interest payments for the initial five-year period ending November 2, 2015 at a rate of 3.70% per annum. The interest rate on the Series 2010-1 Medium Term Notes will reset on November 2, 2015 at the three-month bankers’ acceptance rate plus 1.76% per annum. The Series 2010-1 Medium Term Notes will not be redeemable prior to November 2, 2015. Subject to the provisions of the Bank Act, to the prior consent of OSFI and to the provisions described in the pricing supplement dated October 25, 2010, at any time on or after November 2, 2015, the Bank may redeem all or any part of the then outstanding Series 2010-1 Medium Term Notes, at the Bank’s option, by the payment of an amount in cash equal to the par value together with unpaid accrued interest. The $250.0 million Series 2010-1 Medium Term Notes are presented net of unamortized issue costs of $1.6 million on the consolidated balance sheet and include a net fair value adjustment of $5.9 million to reflect the change in the carrying value previously covered by a fair value hedge.

The Series 9 preferreds, LB.PR.D, pay 6% while Series 10, LB.PR.E, pay 5.25%. Both are Straight Perpetuals.

All this leaves me feeling a bit confused as to why this issue has been left without an NVCC clause. My first thought was that they had some capital instruments outstanding with such an absurdly low coupon that the company wanted to keep them outstanding for as long as possible; issuing these shares to be outstanding when the base for the sliding scale of Tier 1 eligibility is set could have helped such an effort. But this is not the case! Their non-common Tier 1 is actually a little bit expensive; if anything, I would have thought they’d issue NVCC shares to fund the redemption of LB.PR.D.

I just don’t get it. Any suggestions will be welcome. I stand ready to be corrected once the day comes, but I don’t think that a bank NVCC preferred will cost much more than a non-NVCC preferred; we Canadian know that not one of our banks will fail, because the government won’t let it happen.

Anyway, given the absence of an NVCC clause, I have put a DeemedMaturity entry into the call schedule, at 25.00 for 2022-1-31.

The issue traded 438,529 shares today in an unusually wide range of 25.18-65 before closing at 25.30-32, 5×28. Vital statistics are:

This entry was posted on Friday, October 19th, 2012 at 12:30 am and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.