It's official – Canadian investors are more than happy to take the risk of being bailed in on a bank restructuring and they don't ask to be paid much to do it.
National Bank of Canada is the second bank in a week to go to market with a preferred share issue that comes with the possibility of unlucky owners being part of a bail-in of a troubled bank. And it's the second bank in a week to upsize its offering significantly. National Bank said Wednesday morning that it was seeking $200-million. Later in the day, the bank raised it to $350-million to meet the heightened demand.
Royal Bank of Canada last week set out to raise $200-million in the inaugural issue of such preferreds, and ended up selling $500-million.
The two issues answer a big question that arose when regulators started discussing the notion of debt and preferreds with bail-in features: Would it be economical for banks to sell?
Regulators demanded the change as part of Basel III, the latest iteration of bank capital requirements. To qualify as top-quality capital, new bonds and preferreds would have to be convertible into common equity in the case of a bank in deep trouble. The trigger would come if Canada's banking regulator said the bank was at the end of its rope, or in the case of a government bailout.
That's not really an issue at either bank, or any Canadian bank. Still, since part of the reason one buys a bond or a preferred share is to be further up the chain in a restructuring than the poor saps who own common stock, that is a significant concession that ought to come at a price. Ratings agencies have taken notice of that. They have dropped their ratings on the hybrid capital instruments below those of the overall banks that issue them, to reflect the weaker position in the capital structure.
It turns out that in such yield-starved times, the price is not all that steep. The rates on the new issues are about 0.40 percentage points above a comparable preferred without the bail-in risk.
RBC, the country's biggest bank, offered a 4-per-cent coupon.
National Bank is paying more, as a smaller bank that has a lower credit rating from Standard & Poor's. As the smallest of the Big Six banks, it will pay a 4.1-per-cent coupon for the first five years, after which the rate can be reset.