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Market for Contingent Capital to Reach $18 Billion, Moody’s Says

The market for securities that comply with Basel III regulatory capital requirements in Canada will eventually reach C$20 billion ($18.2 billion), according to Moody’s Investors Service.

Royal Bank of Canada sold C$500 million of the non-viability contingent capital, or NVCC, notes yesterday in the first sale of the securities. The notes, designed to convert to equity if a bank gets into financial distress, were rated Baa3, the lowest investment-grade assessment by Moody’s, and BBB+ by Standard & Poor’s. They will act as a model for all the Canadian banks, Moody’s said.

“We expect this issuance could establish a precedent for future NVCC preferred shares in the Canadian market,” according to a report yesterday.

NVCC notes 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.

“The NVCC preferred shares provide loss absorption as they are subject to automatic conversion into common shares, based on a predetermined conversion formula, at the point of non-viability, as defined by the Office of the Superintendent of Financial Institutions Canada,” according to Moody’s.

OSFI guidelines will require all domestic systemically important banks to maintain minimum Common Equity Tier 1 of 8 percent, and total Tier I Capital of 9.5 percent when fully phased-in. That will trigger Tier 1 preferred “in excess of C$20 billion,” Moody’s said, based on 1.5 percent of the largest Canadian banks’ risk weighted assets.

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