New Issue: BMO FixedReset 3.90%+115

The Bank of Montreal has announced:

a domestic public offering of $250 million of Non-Cumulative 5-year Rate Reset Class B Preferred Shares Series 25 (the “Preferred Shares”). The offering will be underwritten on a bought deal basis by a syndicate led by BMO Capital Markets. The Bank has granted to the underwriters an option to purchase up to an additional $50 million of the Preferred Shares exercisable at any time up to two days before closing.

The Preferred Shares will be issued to the public at a price of $25.00 per Preferred Share and holders will be entitled to receive non-cumulative preferential fixed quarterly dividends for the initial period ending August 25, 2016, as and when declared by the board of directors of the Bank, payable in the amount of $0.24375 per Preferred Share, to yield 3.90 per cent annually.

Thereafter, the dividend rate will reset every five years to be equal to the 5-Year Government of Canada Bond Yield plus 1.15 per cent. Subject to certain conditions, holders may elect to convert any or all of their Preferred Shares into an equal number of Non-Cumulative Floating Rate Class B Preferred Shares Series 26 on August 25, 2016 and on August 25 of every fifth year thereafter. Holders of the Preferred Shares Series 26 will be entitled to receive non-cumulative preferential floating rate quarterly dividends, as and when declared by the board of directors of the Bank, equal to the then 3-month Government of Canada Treasury Bill yield plus 1.15 per cent.

The anticipated closing date is March 11, 2011. The net proceeds from the offering will be used by the Bank for general corporate purposes.

There is a long first coupon on this ($0.4461 payable August 25) so mark your calendars – there might be some trading opportunities!

I haven’t seen anything definitive yet, but I believe this will be the first issue with the new NVCC Clause; I will be most interested to see just exactly what it looks like.

They also announced a announced a new issue of sub-debt:

it intends to issue subordinated indebtedness under its Canadian Medium Term Note Program. The issue, the Series G Medium Term Notes, First Tranche, is a $1.5 billion public offering due 2021. Interest on this issue is payable semi-annually at a fixed rate of 3.979% until July 8, 2016, and at a floating rate equal to the rate on 3 month CDOR plus 1.09% (paid quarterly) thereafter to maturity.

Bank of Montreal may, at its option, with the prior approval of the Office of the Superintendent of Financial Institutions Canada, redeem the subordinated indebtedness, in whole or in part, on not less than 30 days and not more than 60 days notice to registered holders, at any time or from time to time on or after July 8, 2016 at par together with accrued and unpaid interest to but excluding the date fixed for redemption.

The net proceeds of the offering, which is expected to close on March 9, 2011, will be used for general corporate purposes of Bank of Montreal.

This makes things doubly interesting, because OSFI expects different treatment of different levels of capital should the NVCC clause be triggered. I presume they’ve consulted with OSFI regarding the wording of the two clauses; these issues could well set the paradigm.

Update, 2011-3-8: The sub-debt prospectus supplement on SEDAR (Mar 4 2011 Prospectus supplement – English) states:

The Notes may not fully qualify as non-common Tier 2 capital under new Canadian bank capital guidelines.

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 Notes as a result may not fully qualify as non-common Tier 2 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 Notes would be phased out beginning January 31, 2013 (their recognition will be capped at 90% of total Tier 2 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 Notes in accordance with their terms.

The similarly available prospectus for the preferreds states:

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 25 as a result may not fully 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 25 in accordance with their terms.

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 25 and, if and when issued, the Preferred Shares Series 26 as a result may not fully 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 25 and the Preferred Shares Series 26 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 25 and the Preferred Shares Series 26, if any, in accordance with their respective terms.

One Response to “New Issue: BMO FixedReset 3.90%+115”

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