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Banks try to avoid early hybrid bond redemption
Holders of billions of dollars of hybrid bonds breathed a sigh of relief on Monday as banks that issued the securities announced they will try to stick to original redemption schedules instead of calling them early and potentially triggering major losses for investors.
Only two outstanding issues of hybrids -- one from Toronto Dominion Bank and the other by Canadian Imperial Bank of Commerce -- will get called in advance of scheduled dates.
The news could have been a whole lot worse.
In the depths of the financial crisis, Canadian banks sold roughly $4.5-billion of hybrid notes, high-interest bonds that convert to Tier 1 capital if issuers get into trouble.
Some of the notes had coupons in excess of 10% and call dates as far out as 2039, which pushed market prices over 155% of face value for some of the securities as the crisis abated in the second half of 2009.
But late last summer, speculation about how the hybrids would be treated under new international bank capital rules began to erode market confidence, sending prices plummeting. By mid-September, market liquidity had partly disappeared, leaving some holders hard-pressed to sell at any price.
The fear was that banks would take advantage of a clause in the prospectuses allowing them to call the notes at par value if a "regulatory event" was deemed to have taken place. When the hybrids were sold, the notion of a regulatory event was far from peoples' minds and the clause attracted little attention. But much has changed since then.
The question plaguing investors: Do the new bank capital rules announced last fall by the Basel Committee on Banking Regulation count as a regulatory event?
On Friday, the Office of the Superintendent of Financial Institutions finally stepped in to remove the uncertainty. It said a regulatory event is not about to take place. The hybrid notes will get gradually phased out between 2013 and the end of 2022, allowing issuers to stick to their original redemption schedules. The only exceptions will be hybrids with call dates past 2022.
On Monday, the banks put out statements laying out how they planned to follow OSFI's instructions. By mid-morning, it was apparent that only CIBC and TD would be calling notes early.
The issue of hybrids has been hugely problematic for both banks and the regulator. On one hand, the securities are an expensive form of capital and the banks have plenty of incentive to redeem them at the earliest opportunity. On the other, Canadian investors stepped up to buy the hybrids at a time when lenders in the rest of the world had basically lost the ability to raise capital in public markets.
For Canadian banks to now turn around and redeem the hybrids early could leave investors feeling they were getting the short end of the stick.
The affected notes were issued by TD and CIBC in the first quarter of 2009.
[email protected]
Holders of billions of dollars of hybrid bonds breathed a sigh of relief on Monday as banks that issued the securities announced they will try to stick to original redemption schedules instead of calling them early and potentially triggering major losses for investors.
Only two outstanding issues of hybrids -- one from Toronto Dominion Bank and the other by Canadian Imperial Bank of Commerce -- will get called in advance of scheduled dates.
The news could have been a whole lot worse.
In the depths of the financial crisis, Canadian banks sold roughly $4.5-billion of hybrid notes, high-interest bonds that convert to Tier 1 capital if issuers get into trouble.
Some of the notes had coupons in excess of 10% and call dates as far out as 2039, which pushed market prices over 155% of face value for some of the securities as the crisis abated in the second half of 2009.
But late last summer, speculation about how the hybrids would be treated under new international bank capital rules began to erode market confidence, sending prices plummeting. By mid-September, market liquidity had partly disappeared, leaving some holders hard-pressed to sell at any price.
The fear was that banks would take advantage of a clause in the prospectuses allowing them to call the notes at par value if a "regulatory event" was deemed to have taken place. When the hybrids were sold, the notion of a regulatory event was far from peoples' minds and the clause attracted little attention. But much has changed since then.
The question plaguing investors: Do the new bank capital rules announced last fall by the Basel Committee on Banking Regulation count as a regulatory event?
On Friday, the Office of the Superintendent of Financial Institutions finally stepped in to remove the uncertainty. It said a regulatory event is not about to take place. The hybrid notes will get gradually phased out between 2013 and the end of 2022, allowing issuers to stick to their original redemption schedules. The only exceptions will be hybrids with call dates past 2022.
On Monday, the banks put out statements laying out how they planned to follow OSFI's instructions. By mid-morning, it was apparent that only CIBC and TD would be calling notes early.
The issue of hybrids has been hugely problematic for both banks and the regulator. On one hand, the securities are an expensive form of capital and the banks have plenty of incentive to redeem them at the earliest opportunity. On the other, Canadian investors stepped up to buy the hybrids at a time when lenders in the rest of the world had basically lost the ability to raise capital in public markets.
For Canadian banks to now turn around and redeem the hybrids early could leave investors feeling they were getting the short end of the stick.
The affected notes were issued by TD and CIBC in the first quarter of 2009.
[email protected]
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