Royal Bank of Canada has set the bar for bail-in debt, issuing the first in a new class of bonds intended to keep taxpayers from having to bail out distressed banks in the event of a crisis.
On Monday, RBC began selling $2-billion of five-year bonds, priced at 95 basis points above government bonds, maturing in 2023. The sale comes one day after new rules came into force, and creates an early benchmark for the premium other large banks can expect to pay as they begin to issue their own bail-in notes.
The bail-in regime aims to keep Canada in step with a global shift as governments look to avoid having to dip into the public purse to prop up banks in times of crisis. In contrast to a bailout where the taxpayer foots the bill, a “bail-in” is meant to rescue a failing bank by making its creditors and shareholders bear some of the cost of recapitalizing it. Under Canada’s new rules, should regulators determine that a systemically important bank is no longer viable, some or all of its bail-in debt could be converted to common shares to help stabilize the bank. It would be up to the Canada Deposit Insurance Corp. to decide how much bail-in debt to convert, giving CDIC officials a new tool to stabilize and wind down a failing bank in orderly fashion.
“Getting the first deal out there, I think, sets pricing and relative pricing for the other banks to follow on," said David Beattie, an analyst at Moody’s Investors Service Inc.
Bail-in debt is considered somewhat riskier than the senior unsecured debt banks have previously issued, and ratings agencies have typically planned to rate bail-in debt one notch lower as a result. But the premium RBC agreed to pay when issuing its new debt is modest – falling at the low end of analysts’ expected range of 10 to 15 basis points above the price of banks' legacy bonds (100 basis points equal one percentage point). An RBC spokesperson said the new bonds were priced eight to 10 basis points higher. That’s because the failure of any major Canadian lender is considered to be unlikely.
“All in all, we think that this is in line with expectations," said Robert Colangelo, a senior vice-president at ratings agency DBRS Ltd.
And as more bail-in debt is issued, and investors grow more comfortable with this new class of notes, that pricing gap could start to narrow. “Our expectation is the pricing will start to tighten, and you might even see that premium go away at some point in the next year or two," Mr. Colangelo said.
The federal government’s consultations on implementing a bail-in regime began in 2014, and the final rules took effect on Sunday. RBC was widely expected to be the first to issue the new debt, and other large Canadian banks are expected to follow suit with their own offerings before the end of 2018, allowing existing debt to be gradually grandfathered out.
All of Canada’s six largest banks are expected to easily meet minimum thresholds for bail-in debt that will come into force in November of 2021.
With files from reporter Alexandra Posadzki
James Bradshaw