TD Bank Sells Callable Step-Up Notes in Return to U.S. Market

Toronto-Dominion Bank, Canada’s largest lender, sold U.S. structured notes for the first time in eight years as it pursues a strategy for growth in its neighboring market.

The bank issued $3.63 million of five-year notes with a coupon of 1.7 percent that grows each year if the bank doesn’t call them, according to a prospectus filed with the U.S. Securities and Exchange Commission. A second sale consisted of $14 million of seven-year notes with a 2.05 percent annual coupon that starts rising in the fourth year if the notes aren’t redeemed, according to a separate prospectus.

The offerings are the first by the Toronto-based company since November 2006, SEC filings show. Each of Canada’s five largest lenders have now issued structured notes in the U.S. this year, led by Royal Bank of Canada, the fifth-largest seller in the market, according to data compiled by Bloomberg.

Bharat Masrani, TD’s chief executive officer, said in a Bloomberg News interview published Oct. 31 that the next leg of the bank’s U.S. expansion would focus on “organic growth opportunities.” TD invested $17 billion over the past decade building a branch network in the U.S., largely through acquisitions.

Alison Ford, a TD spokeswoman, declined to comment on the offering.

Building Team

TD, which also sells structured notes in Canada, said last month it tapped a five-person sales team from Bank of Nova Scotia to expand its U.S. equity-derivatives business, led by Timothy Andrews. Andrews is slated to start in January, according to the bank.

“I think you will see the full breadth of what they can price and what they put out towards the beginning of the year,” said John Tessar, managing director at Boca Raton, Florida-based JVB Financial Group LLC, which distributes structured notes.

RBC issued $3.2 billion of U.S. structured notes this year, outselling Bank of Nova Scotia, Bank of Montreal and Canadian Imperial Bank of Commerce.

TD has a credit rating of Aa1 from Moody’s Investors Service, its second-highest ranking, denoting low risk that the issuer won’t be able to repay its debt. Standard & Poor’s gives the bank an AA- rating, its fourth-highest grade.

TD’s mark from Moody’s is two levels above rival RBC.

“They would both be market leaders in Canada, one and two across most product offerings in the Canadian retail market,” David Beattie, a senior credit officer at Moody’s, said on Nov. 24 in telephone interview.

Canadian banks largely avoided the U.S. financial crisis that precipitated credit-rating cuts at affected lenders. Higher credit ratings allow banks to borrow at cheaper rates.

Banks create structured notes by packaging debt with derivatives to offer customized bets to retail investors while earning fees and raising money. Derivatives are contracts with values derived from stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.

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