{"id":41178,"date":"2020-07-28T21:12:05","date_gmt":"2020-07-29T02:12:05","guid":{"rendered":"http:\/\/prefblog.com\/?p=41178"},"modified":"2020-07-28T21:12:05","modified_gmt":"2020-07-29T02:12:05","slug":"july-28-2020","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=41178","title":{"rendered":"July 28, 2020"},"content":{"rendered":"

DBRS finalized the RBC LRCN rating today<\/a>:<\/p>\n

DBRS, Inc. (DBRS Morningstar) assigned a final rating of A (low) with a Stable trend to Royal Bank of Canada\u2019s (RBC or the Bank) NVCC Additional Tier 1 (AT1) Limited Recourse Capital Notes (Capital Notes). DBRS Morningstar assigned the rating equal to the Bank\u2019s Intrinsic Assessment of AA less four rating notches, which is consistent with DBRS Morningstar\u2019s standard notching for capital instruments with contingent risks and its ratings for the Bank\u2019s NVCC Preferred Shares. This is one notch below the rating of RBC\u2019s NVCC Subordinated Debt.<\/p>\n

On July 28, 2020, RBC issued $1.75 billion of Capital Notes that mature on November 24, 2080, and will have an initial five-year fixed rate of 4.5%. DBRS Morningstar notes that the Capital Notes were granted Tier 1 capital treatment by the Office of the Superintendent of Financial Institutions.<\/p>\n

RATING DRIVERS
\nGiven RBC\u2019s high rating level and the current economic environment, an upgrade of the ratings is unlikely. Ratings would be downgraded if there is a prolonged adverse impact of the Coronavirus Disease (COVID-19) pandemic resulting in a sustained deterioration in asset quality, especially due to deficiencies in risk management. Additionally, a sustained weakening of profitability metrics would also result in a downgrade of ratings.<\/p><\/blockquote>\n

There was something of a peculiar Staff Note published by the Bank of Canada today, Will exchange-traded funds shape the future of bond dealing?<\/a>, by Rohan Arora, Jean-S\u00e9bastien Fontaine, Corey Garriott and Guillaume Ouellet Leblanc:<\/p>\n

The rise of exchange-traded funds (ETFs) makes JIT possible in bond markets. ETFs are securities traded on an exchange, just like stocks, that entitle the bearer to a share in a pool of assets (such as stocks or bonds). For example, a fixed-income ETF might entitle its bearers to a share of a pool of 100 bonds. We find that a dealer can use bond ETFs as a warehouse to meet investor demand to buy and sell bonds. Similar to a car maker using JIT production, the dealer can reduce its inventories of \u201cparts\u201d and order them from its \u201csuppliers\u201d through a JIT approach.<\/p>\n

Admittedly, ETFs make up only a small share of the Canadian asset management industry. Our analysis shows that ETFs in Canada are not yet used as warehouses to a large extent. But the practice is growing in the United States. These changes to the way dealers handle bonds can transform the market by:<\/p>\n