{"id":2044,"date":"2008-04-14T19:31:42","date_gmt":"2008-04-14T23:31:42","guid":{"rendered":"http:\/\/www.prefblog.com\/?p=2044"},"modified":"2008-04-14T19:31:42","modified_gmt":"2008-04-14T23:31:42","slug":"ry-files-innovative-tier-1-capital-prospectus","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=2044","title":{"rendered":"RY Files Innovative Tier 1 Capital Prospectus"},"content":{"rendered":"

I was going to leave this one alone, but I see that some concern is being expressed in the comments to April 11<\/a>.<\/p>\n

Royal Bank has announced<\/a>:<\/p>\n

that it has filed a preliminary prospectus with securities commissions across Canada for the issuance of Innovative Tier 1 capital of the bank.<\/p>\n

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.<\/p>\n

The capital will be issued for general corporate purposes.<\/p><\/blockquote>\n

This is pretty emphatic language (“will issue” … “acted as lead agent” … “will be issued”) so there doesn’t appear to be much doubt.<\/p>\n

In the analysis of RY’s capital structure at year-end<\/a>, it was found that RY’s Tier 1 capital was 15% comprised of Innovative Tier 1 Capital, which is the limit allowed by OSFI<\/a>. Innovative Tier 1 Capital has been briefly discussed on PrefBlog<\/a> … 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<\/a>.<\/p>\n

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.<\/p>\n

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<\/a> will come to fruition.<\/p>\n

Update<\/b>: Here are the details on 1Q08 capital structure<\/p>\n

\n\n\n\n\n\n\n\n\n\n\n
RY Capital Structure
\nOctober, 2007
\n& January, 2008<\/td>\n<\/tr>\n
 <\/td>\n4Q07<\/td>\n1Q08<\/td>\n<\/tr>\n
Total Tier 1 Capital<\/td>\n23,383<\/td>\n23,564<\/td>\n<\/tr>\n
Common Shareholders’ Equity<\/td>\n95.2%<\/td>\n97.9%<\/td>\n<\/tr>\n
Preferred Shares<\/td>\n10.0%<\/td>\n9.9%<\/td>\n<\/tr>\n
Innovative Tier 1 Capital Instruments<\/td>\n14.9%<\/td>\n14.9%<\/td>\n<\/tr>\n
Non-Controlling Interests in Subsidiaries<\/td>\n0.1%<\/td>\n0.1%<\/td>\n<\/tr>\n
Goodwill<\/td>\n-20.3%<\/td>\n-22.8%<\/td>\n<\/tr>\n
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<\/i><\/td>\n<\/tr>\n<\/table>\n<\/div>\n

Principal #1 of the OSFI Draft Guidelines<\/a> states:<\/p>\n

Principle #1: OSFI expects FRFIs to meet capital requirements without undue reliance on innovative instruments.
\nCommon shareholders’ equity (i.e., common shares, retained earnings and participating account surplus, as applicable) should be the predominant form of a FRFI\u2019s Tier 1 capital.<\/b>
\n1(a) Innovative instruments must not, at the time of issuance, make up more than 15% of a FRFI\u2019s net Tier 1 capital. Any excess cannot be included in regulatory capital.
\nIf, at any time after issuance, a FRFI\u2019s 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.
\n1(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.
\n1(c) For the purposes of this principle, \u201cnet Tier 1 capital\u201d means Tier 1 capital available after deductions for goodwill etc., as set out in OSFI\u2019s MCCSR or CAR Guideline, as applicable.<\/p><\/blockquote>\n

An Advisory dated January 2008<\/a> states:<\/p>\n

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.<\/p><\/blockquote>\n

RBC’s extant Innovative Tier 1 Capital<\/a> does not have any interesting dates coming up. RY.PR.K has its soft-retraction coming up<\/a> in August … but these are currently in Tier 1 capital in the “preferred” category, having been grandfathered from the old rules.<\/p>\n

So what’s up? It would seem that there’s another shoe left to drop.<\/p>\n

Update, 2008-04-21<\/b>: They are issuing $500-million with a pretend-10-year maturity, at Canadas + 310bp<\/p>\n","protected":false},"excerpt":{"rendered":"

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 …<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[16],"tags":[],"class_list":["post-2044","post","type-post","status-publish","format-standard","hentry","category-miscellaneous-news"],"_links":{"self":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/2044","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=2044"}],"version-history":[{"count":0,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/2044\/revisions"}],"wp:attachment":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=2044"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=2044"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=2044"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}