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Gloria Nieto/The Globe and Mail

The group that represents Canada's biggest bond investors is frustrated with the way Royal Bank of Canada sold its latest debt offering – a deal worth $1-billion – and has requested that regulators do something to address the issues.

In early July, RBC became the first Canadian bank to sell bonds that that can be treated as non-viability contingent capital (NVCC). This form of debt was required by the Basel Committee on Banking Supervision coming out of the Great Recession, and its terms allow the bonds to be converted into equity in the event of a financial crisis. In short: bond investors, who usually rank higher in the capital structure, can quickly become measly shareholders.

Analysts have long expected a bank like RBC to test the waters with their first NVCC issue, to see whether investors would be willing to buy this type of debt. But some people expected banks to wait until the federal Department of Finance released its own rules regarding "bail-in debt."

These regulations are expected to mirror the NVCC rules, which allow certain types of bonds to be converted into equity in the event of a crisis, but they would apply specifically to senior bank debt that does not count toward capital requirements – whereas NVCC debt does, making the latter more advantageous for banks to sell.

Because these rules haven't been finalized, institutional investors have been worried about scooping up NVCC issues, because they aren't quite sure how it will all shake out, and can't yet calculate just how much bank debt they own that could eventually be converted into equity. Fixed-income investors pride themselves on being higher in the capital structure so that in the event of a bankruptcy they get first dibs on assets; the new conversion rules would wipe out this special status.

For this very reason the Canadian Bond Investors' Association, which represents 33 fixed-income investors with $615-billion of assets under management, sent letters to top regulators and the Finance Department expressing frustration about the timing of the deal.

"This issue generated considerable concerns from many members of our organization," they wrote, because the deal was launched "without the benefit of a full regulatory road map.

"The critical issue of bail-in debt has not been addressed, thus leaving institutional fixed-income investors in an uncomfortable position when evaluating NVCC instruments," the CBIA wrote.

Although the Finance Department promised to outline the bail-in rules in the 2013 budget, there hasn't been a peep since. "We believe that NVCC issues will gain more widespread acceptance by the institutional fixed income community only once this has occurred," the CBIA wrote.

This isn't the only issue that rankled these investors. The industry group also said many of its members are frustrated with the way the RBC deal was sold, because it was "highly deficient in terms of timely access of information to bond investors."

For over a year now, the CBIA has asked regulators to require debt issuers to give investors more time to address new issue structures. Often when a new deal comes to market, the investment bank underwriting the offering will launch it in the morning, and then have it fully sold and priced by early afternoon.

RBC did more than usual in this case, previewing the new structure to investors in a prerecorded online roadshow two days ahead of the deal. But investors say this wasn't enough, especially because there were no opportunities to ask questions. The bank also did not receive final debt ratings for these bonds before it sold them, and therefore launched the issue based on "expected ratings."

"We believe it was improper to have a deal of this magnitude and importance rushed through the system and a number of our members believe it was an abuse of the new issue process," the CBIA wrote in a letter to provincial securities regulators.

Pushing back, RBC argues that it followed all the applicable rules. "We are committed to following best practices in all our transactions and have a strong history of doing so," the bank wrote in an e-mail. "For Canadian debt new issues, we follow market established best practices, including abiding by all legal and regulatory requirements."

The bank also argued that the $1-billion deal had orders amounting to $2.5-billion, demonstrating that there were a plethora of investors who were happy to buy in.

When asked why the frustrated bond investors didn't band together to boycott the offering, the CBIA's Joe Morin, who is also a vice-president at fixed-income specialist Canso Investment Counsel, said in an interview that such collusion is illegal. "We can't just do something like that," he said. For that reason, the bond investors are reaching out to the regulators for help.

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