Canadian Bond Group Says RBC Basel Sale Lacks Disclosure

Some of Canada’s largest bond investors are asking regulators to examine a Royal Bank of Canada debt sale, saying not enough time was given to analyze the first deal in a market that may increase to C$25 billion.

Royal Bank provided investors with insufficient information on short notice before its July 11 sale of C$1 billion ($930 million) in subordinated notes that can convert to equity, the first in Canada to comply with new international banking rules, The Canadian Bond Investors Association said in a letter yesterday to provincial securities regulators. Toronto-based Royal Bank said it met all requirements.

RBC’s non-viability contingent capital bonds were issued to meet regulations under the Basel III capital requirements being adopted around the world to prevent the need for future government bank bailouts. The complaint highlights the position investors find themselves, having to take on more risk with yields on Canadian corporate debt close to the lowest on record when compared with benchmark government securities.

“The buyers could have gone on strike and not bought this,” said David Beattie, senior credit officer at Moody’s Investors Service, said by phone from Toronto. “The reality is there’s very little yield product out there. Canadian banks are the most significant corporate issuers.”

The Basel III rules say subordinated debt like the kind RBC sold must convert to equity if a lender gets into financial distress, to ensure that investors, rather than taxpayers, contribute to a bank’s rescue.

Investor Abuse

Because it was the first issue of its kind, investors needed time to understand the rules under which their debt would become equity, the CBIA, which said it represents 33 of the largest fixed-income investor organizations in Canada including Manulife Asset Management Ltd. and TD Asset Management Inc., said in its letter.

“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 letter said. “We ask that the Canadian securities regulators look at the new-issue process for this security and whether it was appropriate in the circumstances.”

The market for the new type of debt could grow to C$25 billion in the next decade, according Bank of Montreal.

Only a brief, pre-recorded Internet presentation was provided to investors less than two days before the deal, the association said. No final comments from ratings companies on the deal were available when it came to market, with only “expected” ratings provided, the association said.

Requirements Met

Royal Bank “met all legal and regulatory requirements in issuing this transaction,” Sandra Nunes, a spokeswoman for the company, said in an e-mail yesterday. “The deal was well oversubscribed, and it has performed well in the secondary market.”

Since the July 11 sale at a yield of 152 basis points, or 1.52 percentage points, more than Canadian government debt, the spread on the Royal Bank bonds has narrowed to about 146 basis points, according to data compiled by Bloomberg.

Lenders need to sell the NVCC bonds in part because regulations designed to make banks safer mean they must phase out older forms of subordinate debt that didn’t convert into equity.

The Canadian Bond Investors Association recommended regulators require bond dealers turn over all relevant information on a new issue three days before the sale, and require a public forum where questions can be asked.

The group also wrote authorities including Finance Minister Joseph Oliver and Bank of Canada Governor Stephen Poloz to ask the government to release the rules governing how bond holders would share the burden of a bank failure.

The industry group reiterated concerns raised in an April 2013 letter to regulators that focused on access to bond indentures.