RBC Sells First Bond by Canadian Bank to Satisfy Basel III Rules

Royal Bank of Canada (RY) said it sold
C$1 billion ($930 million) of junior-ranking bonds that comply
with Basel III regulatory capital requirements.

RBC’s bond issue marks the first by a Canadian bank that is
considered non-viability contingent capital by regulators,
according to Patrick MacDonald, co-head of debt capital markets
at the bank’s securities unit in Toronto. The notes are designed
to convert to equity if a bank gets into financial distress,
according to Standard & Poor’s.

So-called NVCC debt will be used to replace existing
subordinated securities, which are being phased out to comply
with international banking standards designed to prevent a rerun
of the 2008 financial crisis. Canada’s market for securities
that can be converted into capital in a crisis will eventually
reach C$20 billion, Moody’s Investors Service said in January.

Moody’s rated the notes Baa1, four levels lower than the
bank’s senior rating of Aa3. Standard & Poor’s rates the debt A-, two levels below the bank’s rating of A+.

A trigger event will convert the bonds into equity without
the holder’s consent, S&P said. For example, it defined such as
events as Canada’s bank regulator publicly announcing it has
advised a bank that the lender has ceased to be viable and
conversion of the notes would restore its viability; or the
bank’s viability will be restored or maintained; or the federal
or provincial government announces that the bank has accepted a
capital injection, or equivalent support, from a government or
agency to keep the bank afloat.


5 thoughts on “RBC Sells First Bond by Canadian Bank to Satisfy Basel III Rules”

  1. Here’s a dumb question… If one were to invest in these bonds and then they are called… does that mean I lose my investment?

    1. That is a really good question – traditionally Government Bonds have always been one of the safest long investments – a guaranteed yield over x length of time. The risk is the issuer of the bond and how much you trust the issuer. IMO it comes down to – what is the markets faith that the issuer will be able to make good their promise at the end of the length of time proposed by the Bond.

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