Posted by Andrew Willis on the Globe & Mail's Streetwise:
In the Candian banks' seemingly endless push to raise more capital, there's now a race to see who gets to market first, CaTS or BaTS.
After saturating the market with preferred shares this week, and common stock before the holidays, the banks are preparing to issue what's known as Innovative Tier 1 Capital Securities. All of this comes at the same time regulators are being urged to accept new forms of financing.
Now, no financier wants to get on the phone pitching that cumbersome name – these securities have been around for the better part of a decade, so they aren't even innovative. So each bank has a nickname for these units, which count as equity from an accounting point of view, but trade based on yield, much like debt.Toronto-Dominion Bank filed the paperwork Wednesday for an issue of CaTS, but there's an expectation that Bank of Nova Scotia may try to tap the market first, with a BaTS issue. These financings typically range in size from $200-million to $1.2-bilion.
For investors and corporate finance types, the key question is what terms institutions will demand for taking down more bank paper. Bank of Monteal paid what was seen as a premium price to sell the most recent of these financings, a $450-million issue of what's known as BOaTS II that came in mid-December. That issue led to a re-pricing of the entire market.
All of this activity is driven by the bank's push to build Teir 1 capital ratios to the 10 per cent level. For those keeping score, the estimated Tier 1 capital ratios at Canadian banks are now at approximately 10.48% for Bank of Montreal, 10.48% for Canadian Imperial Bank of Commerce; 10.15% for Royal Bank; 9.38% for National; 9.78% for TD and 9.04% for Scotiabank.
As TD Waterhouse noted in a report Thursday: “Although Canadian banks are well capitalized, the market has set the bar higher for Tier 1 capital to match new standards set by U.K. and U.S. banks which have been partially nationalized and recapitalized.”