I was going to leave this one alone, but I see that some concern is being expressed in the comments to April 11.
Royal Bank has announced:
that it has filed a preliminary prospectus with securities commissions across Canada for the issuance of Innovative Tier 1 capital of the bank.
RBC Capital Trust, a subsidiary of Royal Bank of Canada, will issue RBC TruCS Series 2008-1. RBC Capital Trust is a closed-end trust established under the laws of Ontario. RBC Capital Markets acted as lead agent on the issue.
The capital will be issued for general corporate purposes.
This is pretty emphatic language (“will issue” … “acted as lead agent” … “will be issued”) so there doesn’t appear to be much doubt.
In the analysis of RY’s capital structure at year-end, it was found that RY’s Tier 1 capital was 15% comprised of Innovative Tier 1 Capital, which is the limit allowed by OSFI. Innovative Tier 1 Capital has been briefly discussed on PrefBlog … basically, it’s a preferred share dressed up in bonds’ clothing to seduce the unwary. Spreads have widened considerable during the credit crunch, and I now see the that the TruCS with a pretend-maturity of Dec 31/2015 are quoted at 282bp-272bp over Canadas, a huge increase over the 60-ish bp spread in February 2007.
Due to the nature of RY’s capital structure, I’m a bit surprised that they’re issuing the Innovative Tier 1 rather than preferred shares … but if we assume they can do a new deal at 300 over Canadas for a pretend-10-year term, that would be about 6.55%. If we assume that they would have to offer 5.8% for a preferred, that’s an interest equivalent of 8.12% and given the fragility of the market, a mere 5.8% is by no means assured.
For the nonce, Assiduous Readers may presume that this pseudo-bond issuance decreases – very, very slightly – the chance that speculation regarding a RY preferred issue will come to fruition.
Update: Here are the details on 1Q08 capital structure
| RY Capital Structure October, 2007 & January, 2008 |
||
| 4Q07 | 1Q08 | |
| Total Tier 1 Capital | 23,383 | 23,564 |
| Common Shareholders’ Equity | 95.2% | 97.9% |
| Preferred Shares | 10.0% | 9.9% |
| Innovative Tier 1 Capital Instruments | 14.9% | 14.9% |
| Non-Controlling Interests in Subsidiaries | 0.1% | 0.1% |
| Goodwill | -20.3% | -22.8% |
| Note that the definition of “Goodwill” has not only changed from Basel 1 to Basel 2, but there are some exciting new categories of Tier 1 Capital deductions as well, which have been included in the “Goodwill” shown here | ||
Principal #1 of the OSFI Draft Guidelines states:
Principle #1: OSFI expects FRFIs to meet capital requirements without undue reliance on innovative instruments.
Common shareholders’ equity (i.e., common shares, retained earnings and participating account surplus, as applicable) should be the predominant form of a FRFI’s Tier 1 capital.
1(a) Innovative instruments must not, at the time of issuance, make up more than 15% of a FRFI’s net Tier 1 capital. Any excess cannot be included in regulatory capital.
If, at any time after issuance, a FRFI’s ratio of innovative instruments to net Tier 1 capital exceeds 15%, the FRFI must immediately notify OSFI. The FRFI must also provide a plan, acceptable to OSFI, showing how the FRFI proposes to eliminate the excess quickly. A FRFI will generally be permitted to include such excesses in its Tier 1 capital until such time as the excess is eliminated in accordance with its plan.
1(b) A strongly capitalized FRFI should not have innovative instruments and perpetual non-cumulative preferred shares that, in aggregate, exceed 25% of its net Tier 1 capital. Tier 1-qualifying preferred shares issued in excess of this limit can be included in Tier 2 capital.
1(c) For the purposes of this principle, “net Tier 1 capital” means Tier 1 capital available after deductions for goodwill etc., as set out in OSFI’s MCCSR or CAR Guideline, as applicable.
An Advisory dated January 2008 states:
After taking into account the fundamental characteristics of tier 1 capital and reviewing guidance in other jurisdictions, OSFI has decided to increase this limit to 30%. The maximum amount of innovative tier 1 instruments that can be included in the aggregate limit calculation continues to be 15% of net tier 1.
RBC’s extant Innovative Tier 1 Capital does not have any interesting dates coming up. RY.PR.K has its soft-retraction coming up in August … but these are currently in Tier 1 capital in the “preferred” category, having been grandfathered from the old rules.
So what’s up? It would seem that there’s another shoe left to drop.
Update, 2008-04-21: They are issuing $500-million with a pretend-10-year maturity, at Canadas + 310bp
First of all, what an incredibly detailed and concise analysis of this issue! I think you should probably start charging a subscription to this blog; I’ve never seen so much topical and useful information provided “for free” in any one place ever before.
On this subject now; a hat’s off to RBC for doing something [and yes, I know they are not concerned about what’s good for the market, etc.] that preserves the value of at least some of their existing securities. If they just came to the market like TD, BMO, etc. with a “bull in a china shop” mentality, and threw out a 5.8% (or higher) dividend, then we’d very probably be looking at another mini-melt not only in their own prefs, but most of the other perps as well. Instead, the market which has been slow, but to the upside of late, appears this morning to be continuing it’s slow crawl away from palukaville. Beyond that, RBC might enjoy a lower dividend offering on any subsequent pref offering down the road should this mood of reasonable sanity continue.
And you are right; another shoe could be left to drop, but at least for now, this shoe is possibly far enough away that another rate drop might be able to sustain and grow this positive pref sentiment we’ve seen of late.
madequota
p.s. nice banner ad on Globeinvestor! . . . you think Rob Carrick might see it and be motivated to write another pro-pref piece!?
Thanks for the kind words … but, er, WHAT banner ad on Globeinvestor? I have a google ad for PrefLetter that runs there from time to time – is that what you mean?
that must be it; but it was the top header most of the day yesterday at Globeinvestor.com . . . (I monitor the site for various updates throughout the day) . . . strangely, it’s not there right now.
NA.PR.M opened today, and although underwater, it seems pretty strongly bid $24.80 on down . . . lightly offered at $24.85 and up . . . abnormally light volume as well, with only some 67K traded in the first 10 minutes. Another good sign is BMO with buy-side “icebergs” at $24.80 and $24.75 which should provide all the support this thing needs to hold firm.
I would say that once the underwriters get through their sorry inventory, this thing might be pretty good.
madequota
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