TD has announced:
that TD Capital Trust IV (the “Trust”), a subsidiary of TDBFG, and TDBFG have entered into an agreement with a syndicate of underwriters led by TD Securities Inc. for an issue of $550,000,000 TD Capital Trust IV Notes – Series 1 due June 30, 2108 (“TD CaTS IV – Series 1”) and $450,000,000 TD Capital Trust IV Notes – Series 2 due June 30, 2108 (“TD CaTS IV – Series 2”) (collectively, the “TD CaTS IV Notes”). The offering will raise aggregate gross proceeds of $1 billion. TD Capital Trust IV and TDBFG intend to file a final prospectus with the securities regulators in each of the provinces and territories of Canada with respect to the offering of the TD CaTS IV Notes.
TDBFG anticipates the TD CaTS IV Notes will qualify as Tier 1 Capital of TDBFG. Any Tier 1 Capital over the 15% regulatory limit will temporarily be counted as Tier 2B Capital. The expected closing date is January 26, 2009.
From the date of issue to, but excluding, June 30, 2019, interest on the TD CaTS IV – Series 1 is payable semi-annually at a rate of 9.523% per year. Starting on June 30, 2019, and on every fifth anniversary thereafter until June 30, 2104, the interest rate on the TD CaTS IV – Series 1 will reset as described in the prospectus.
From the date of issue to, but excluding June 30, 2039, interest on each TD CaTS IV – Series 2 is payable semi-annually at a rate of 10.00% per year. Starting on June 30, 2039, and on every fifth anniversary thereafter until June 30, 2104, the interest rate on the TD CaTS IV – Series 2 will reset as described in the prospectus.
On or after June 30, 2014, the Trust may, at its option and subject to certain conditions, redeem the TD CaTS IV – Series 1 or the TD CaTS IV – Series 2, in each case, in whole or in part.
In certain circumstances, the TD CaTS IV Notes or interest thereon may be automatically exchanged or paid by the issuance of non-cumulative Class A first preferred shares of the Bank.
The TD CaTS IV Notes will not be listed on any stock exchange.
Only the Preliminary Prospectus is available on SEDAR. The rate reset is off 5-Year Canadas, but the spread is not defined. These notes use the recently approved structure, whereby the notes are sold with a definite maturity and carry interest that can cumulate in preferred shares when cash is not paid.
The initial rate is fixed to 2019, as noted in the press release. At first blush, and subject to a look at the final prospectus, particularly with respect to the reset rate and issuer’s redemption options, these notes look superior to TD’s 6.25%+437 Fixed-Reset Preferreds.
That strikes me as an extremely high rate of interest (bordering on junk)and sends a worrying message about the slippery slope facing the banks over the next few quarters.
It is a high rate of interest, but you must remember what you’re being paid for: this is Tier 1 capital, distributions can be suspended in times of trouble, and holders may not place the company in bankruptcy if they don’t get their money.
It is appropriate for such instruments to come at a wide spread to senior debt and to be roughly equivalent to preferred shares in risk/reward terms.
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Thanks for the explanation but it is still worrying. It will cost them $100 million annually to pay the interest on these notes and with the yield curve being so flat it is hard to see how this can be a profitable proposition. What it looks like is that they are preparing for blizzard of bad debts/writeoffs and are bulking up their cash reserves while they still can regardless of cost.
with the yield curve being so flat it is hard to see how this can be a profitable proposition.
They have to have Tier 1 Capital in order to do business. The regulators insist on 7% Tier 1 Capital; the market is now looking for 10%.
These are expressed as fractions of risk-weighted assets; loans to, say, corporations come with a risk weight of 1.
Therefore, with this $1-billion of expensive capital – call it 10% – they can borrow $9-billion from depositors – at, say, 3% – and lend it to corporations – at, say, 6%. Gross Interest margin = $10-billion x 6% – $1-billion x 10% – $9-billion x 3% = $600-million – $100-million – $270-million = $230-million, which is good business.
In the absence of this tier 1 capital, it would be illegal for them to do the retail deposits vs. corporate loans business. They have to have it.
Thks for the explanation with calculations and figures to illustrate it. I was very unhappy with the answers I was getting from financial institution experts on the similar concerns I have toward our “said to be” rock solid Canadian banks. However, your explanation still does not answer the concern as to why such an expensive Tier 1 issuance is objectively better for the shareholders than either:
a) another issuance of 1 billion dollars in comon stock; or of
b) a 50% reduction of TD’s dividend on ordinary shares for a year.
Yes, both of the above options would adverserly affect the value of the ordinary shares on the stock exchange (secondary) market. However, it would in fact be better for the share’s book value since the TD would then save 100 millions in interest payment per year for at least the next 10 years. What is the benefit of artificially maintaining the ordinary shares’ market value by maintaining a dividend so costly to maintain?
Louis,
Taking your argument to an extreme, a bank should not pay a dividend.
I guess all other things are not being equal.
Adrian
Remember that the $100-million is tax deductible.
TD calculates their “return on invested capital” in Table 4 of Page 20 of their Annual Report.
They’re looking at a return of 12.4% in 2008. In order to achieve this from a net interest margin of 2.22% (page 22) they have to lever up their common equity. Levering with 10% Tier 1 capital isn’t as much fun as levering with 3% deposits … but it’s still leverage!
Adrian2: I fear I did not express my argument clearly enough then. A bank should not maintain a dividend if, in order to do so, it has to borrow money at a rate soon to be (in a few hours) 10X the BOC’s rate. It would be a better investment to capitalise its ordinary share dividend by not declaring it.
John: OK, fine. the Bank is “only” depriving itself of approximately 70 million per year net of taxes but this is still 70 millions per year lowering the bank’s return when it is not necessary. My point is also not about levering with 10% Tier 1 capital rather than with 3% deposit but levering with 10% tier one capital when levering with the proceeds of not paying a dividend or with additionnal ordinary capital costs 0% to the company.
I truly don’t know the answer but cannot refrain from suspecting that they are improvising which is no comfort to me. I do also believe that by rather cutting the dividends on their ordinary shares banks would ultimately speed up their recovery (while, in the meantime, re-energising the pref market). Why run after capital when there is so little available on the market??? Is it that the ordinary shares’ market value as an impact on the determination of the Tier 1 capital requirement? I don’t see how it could be.
Natural capitalisation by not declaring dividends does not need any costly premium paid to anyone. So far, the only explanation I have heard is that Canadian banks are maintaining their dividend because they have always done so, except for NA, since WWII. The bank’s pride is not a valid justification. We are going through extremely difficult times which more than warrant cutting dividends as any corporation (including banks) are perfectly entitled to unless, again, there is another reason I am missing…
the Bank is “only” depriving itself of approximately 70 million per year net of taxes but this is still 70 millions per year lowering the bank’s return when it is not necessary. My point is also not about levering with 10% Tier 1 capital rather than with 3% deposit but levering with 10% tier one capital when levering with the proceeds of not paying a dividend or with additionnal ordinary capital costs 0% to the company.
The $70-million net of taxes does not lower their return. This figure is a necessary cost of doing business. If they want to earn (to repeat earlier sample figures) $600-million p.a. gross interest income on $10-billion corporate loans then they have to have Tier 1 Capital.
Not paying a dividend would crater the common stock by taking away all incentive to own it.
Additional ordinary capital will only cost them 0% if they pay their shareholders 0%. They want to continue to pay their shareholders a return on equity of 12.4%. And the only way to do this in a business where their net interest margin is 2.2% is to lever it up.
To substitute common capital for the 10% Innovative Tier 1 Capital would decrease shareholder returns (per share) and get them all fired.
The fear of getting all fired might be the explanation…
However, I thought that the primary incentive for owning equities is their potential increase in value. Having equities competing with prefs on effective dividend yields is, in my opinion, one of the reasons why our portofolios of prefs are not providing us with the return / protection we paid for.
Costly Tier 1 Capital ranking ahead of ordinary shares is not dilutive in the sense that it does not add other people to the table. However, it causes less food to reach that table. I would also have thought that the net book value of the ordinary shares will remain exactly the same whether the additional capital injection is made via anyone of either:
a) ordinary shares;
b) Pref or other tier one capital; and
c) dividend reduction on ordinary shares.
It is, however, as such “hyperprime” interest start to accrue over this Innovative Tier 1 capital over a period of time that the “mistake” insidioulsy takes its toll. This is how those directors afraid of losing their jobs are hypothecating the company’s future growth.
Bankers themselves are apparently not learning from the mortgage crisis.
By maintaining record high effective yields on their ordinary shares (even more so if you compare spreads with Canada bonds or alike) Banks are:
a) not diminishing their own needs for liquidities to pay such yields (not a good idea nowadays);
b) maintaining unreasonably high expectations on returns (we would / should all be happy nowadays to make only a 3% return if the value of our portfolio could stop falling). Yes, investors might swap their stock for the higher payor of yield for a while but I suspect they are all waiting to see which one is going to do it first;
c) By exacerbating their need for levering, in deleveraging times, Banks are themselves creating more demand for cash, therefore increasing the demand and yields on commercial financing, etc.
Unconsiencely, our financial system has entered into a Ponzi scheme. I know, it sounds crazy. However, if history can teach a lesson:
Just by way of an example, Citigroup today declared a 0.01 cent dividend on its ordinary shares (the maximum they are allowed to, without the U.S. government consent, after having received TARP capital injection). There seems to be again an element of defiance here (probably marketing) in nevertheless declaring a one cent dividend as if Citi is telling to the world that they only declare a one cent dividend because of the scrouge US governement!!!
Since Meredith rang the alarm bell less than 1 1/2 year ago when they were paying their full dividend (more than half of today’s ordinary share’s value if I am not mistaken), Citi first raised expensive financing / capital from Dubai. Despite the TARP money, massive reduction of interest rates by the Fed, liquidity injections, etc. how goes the patient today? It still needs more capital!
Obviously, our Canadian banks are in a better position than their US counterparts but are we that much brighter? Everyone I know in the Canadian financial system is admitting to me that their institution is looking for cash as they never did before (as also transpires from the need for innovative ways of raising cash we now see). However, when is looking that much for cash, isn’t it highly symptomatic of liquidity problems? What about the legal liquidity test before one may legally pay dividends?
I just think we have to start thinking in a different way than the way we have done in the last 18 months.
Rgds,
Hi,
If you are steadily building a portfolio of fixed income, it seems to make sense to buy $5k of this stuff from TD Waterhouse and put it in a TFSA.
Anyone know if it will be sold to retail customers via a discount broker and if so is it already out there?
thanks
I’m new to this kind of investment but a friend recommended purchasing these. It does seem like a great rate of return. Interesting to see the arguments of risk, etc. Thanks for that. Now my question is how to buy them? Is this the same as purchasing TDD.M? I only have a discount/self service broker account so no one to ask!
it seems to make sense to buy $5k of this stuff from TD Waterhouse and put it in a TFSA.
I suggest that due to the easy withdrawal possibilities, the TSFA be used for near-cash instruments.
Anyone know if it will be sold to retail customers via a discount broker and if so is it already out there?
I don’t know – sorry!
Is this the same as purchasing TDD.M?
No. “The TD CATS IV will not be listed on any stock exchange.”
I only have a discount/self service broker account so no one to ask!
Oh, you can ask! You’ll just have to stay on the line for a while, while they tell you how important your call is to them and how astonished they are at the volume of incoming calls.
First check your broker’s on-line fixed-income offerings; then call customer service and ask specifically for an offer.
TD CaTS or even the recent CIBC Tier 1 Capital Trust can be bought via TD Waterhouse Discount. I think they call their Bond Desk to see if they have it on inventory. jiHymas, thanks AGAIN, for your insightful commentaries.