Royal Bank of Canada’s (TSX:RY) recent issue of a new form of subordinated debt is raising the hackles of a group of bond investors.
The Canadian Bond Investors’ Association (CBIA), a group of 33 institutional bond investors, has written to both securities regulators and federal finance officials in connection with RBC’s recent issue of non-viability contingent capital (NVCC) sub debt, complaining that investors don’t have enough information about how the bank bail-in process would work, or the features of novel securities designed to facilitate this process for a bank facing possible failure.
The CBIA’s letter to securities regulators indicates a certain amount of “investor discontent” with the new issue process. And, in particular, it claims that RBC’s recent NVCC issue “was highly deficient in terms of timely access of information to bond investors.”
It calls on the regulators to develop best practices for providing information to investors at least three days for a new debt structure is priced; requiring question and answer sessions with investors; and permitting rating agencies to provide preliminary reports. “We believe these best practices are important for institutional investors to meet their fiduciary duty to clients,” it says.
The letter says that when the RBC issue was launched, investors only received a brief, pre-recorded roadshow less than two days ahead of the deal, with no opportunity to ask questions; and, no final rating agency comments were available. “The CBIA believes this is not in line with best practices when a deal of this significance is in the market involving an instrument that is new to institutional investors,” it says.
It notes that this issue of NVCC subordinated debt was “the first of its kind in Canada, and as such there was a significant amount of new disclosure concerning the pricing of these instruments and the mechanics on conversion that had not been made available to Canadian investors previously… As such, 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.”
So, it asks the securities regulators to examine the new issue process for this security in particular, and it calls for regulators to establish and enforce a minimum review period for new issuers and for novel securities.
In a separate letter to the federal Finance department, the Bank of Canada, and the Office of the Superintendent of Financial Institutions (OSFI), the CBIA also complains that the issue came to market without investors having “a full regulatory road map” for how the bank bail-ins would work.
It calls on Finance to “expedite the process for providing clarity on the ‘bail-in’ framework”; stressing that, “Institutional investors need clarity on bail-in debt to ensure thorough risk assessment and pricing of NVCC instruments.”