National Bank of Canada has announced:
that it has entered into an agreement with a group of underwriters led by National Bank Financial Inc. for the issuance on a bought deal basis of 10 million non-cumulative 5-year rate reset first preferred shares series 36 (non-viability contingent capital (NVCC)) (the “Series 36 Preferred Shares”) at a price of $25.00 per share, to raise gross proceeds of $250 million.
National Bank has granted the underwriters an option to purchase, on the same terms, up to an additional 2 million Series 36 Preferred Shares. This option is exercisable in whole or in part by the underwriters at any time up to two business days prior to closing. The gross proceeds raised under the offering will be $300 million should this option be exercised in full.
The Series 36 Preferred Shares will yield 5.40% annually, payable quarterly, as and when declared by the Board of Directors of National Bank, for the initial period ending August 15, 2021. The first of such dividends, if declared, shall be payable on November 15, 2016. Thereafter, the dividend rate will reset every five years at a level of 466 basis points over the then 5-year Government of Canada bond yield. Subject to regulatory approval, National Bank may redeem the Series 36 Preferred Shares in whole or in part at par on August 15, 2021 and on August 15 every five years thereafter.
Holders of the Series 36 Preferred Shares will have the right to convert their shares into an equal number of non-cumulative floating rate first preferred shares series 37 (non-viability contingent capital (NVCC)) (the “Series 37 Preferred Shares”), subject to certain conditions, on August 15, 2021, and on August 15 every five years thereafter. Holders of the Series 37 Preferred Shares will be entitled to receive quarterly floating dividends, as and when declared by the Board of Directors of National Bank, equal to the 90-day Government of Canada Treasury Bill rate plus 466 basis points.
The net proceeds of the offering will be used for general corporate purposes and added to National Bank’s capital base. The expected closing date is on or about June 13, 2016. National Bank intends to file in Canada a prospectus supplement to its December 1, 2014 base shelf prospectus in respect of this issue.
They later announced:
that as a result of strong investor demand for its previously announced domestic public offering of non-cumulative 5-year rate reset first preferred shares series 36 (non-viability contingent capital (NVCC)) (the “Series 36 Preferred Shares”), the size of the offering has been increased to 16 million shares. The gross proceeds of the offering will now be $400 million. The offering will be underwritten by a syndicate led by National Bank Financial Inc. The expected closing date is on or about June 13, 2016.
The net proceeds of the offering will be used for general corporate purposes and added to National Bank’s capital base.
As has so often been the case recently, using Implied Volatility analysis to determine whether the pricing of this issue is rich or cheap yields ambiguous results:
Click for Big
The new issue fits in very well with the line determined by the three extant NVCC-compliant issues, but the Implied Volatility is very high. Thus, if one believes that spreads are very high and will eventually regress to more usual levels, one will buy the low-spread low-price issues in order to capture the expected capital gain. However, if one believes that current conditions represent the new normal (with low GOC-5 yields and spreads that are high relative to historical norms) then one will buy the high-spread high-price issues in order to avoid the capital loss that one expects on the low-spread issues as Implied Volatility declines and the curve flattens.
Thanks to Assiduous Readers FletcherLynd, brian and klargenf, who discussed this issue in the comments to New Issue: NA FixedReset, 5.60%+490 (which was NA’s previous new issue).
The announcement of this issue came in 24 hours after the bank’s CEO had declared the following:
QUOTE
TORONTO, June 1 (Reuters) – National Bank of Canada said on Wednesday it had no plans to raise capital from shareholders after its second-quarter profit nearly halved as clients in the oil and gas industry struggled to repay loans.
Canada’s sixth-biggest lender raised C$300 million through a share offering last October after its core tier 1 ratio, a key measure of financial strength, fell to the 9.5 percent minimum required by the country’s financial regulator.
That capital raise helped it improve the ratio to 9.8 percent at the end of April.
The bank warned last month that it needed to set aside C$250 million, or C$183 million after tax, to cover bad loans to oil and gas firms, again raising questions about its capital strength.
Chief Executive Louis Vachon said on Wednesday the bank had set a target for its core tier 1 ratio to hit 10 percent by the end of 2017 at the latest but was not planning to tap shareholders again to achieve that goal.
“At this stage we do not plan (an equity issue),” he told analysts on a conference call. “We think we can do that organically without having to do an equity issue and the equity issue I can assure you would be the very, very last option that we would look at.”
UNQUOTE
To his defence, people will say that Mr. Vachon meant by that that no issuance of “ordinary shares” would be made but this is not what he is reported as having said. Mr Vachon knew or ought to have know that “raising capital” or having “an equity” issue includes issuing prefs and that this new 250 Million (now 300 M) pref issue was in the works such that he should have refrained opening his mouth on the topic the way he did.
I haven’t been too impressed with Mr. Vachon since his foray into ABCP using funds from his money-market fundholders in 2007, as discussed August 20, 2007.