Thursday, January 15, 2009

TD unleashes a billion CaTS

By Andrew Willis in the Globe & Mail's StreetWise:

Toronto-Dominion Bank unleashed a whole lot of CaTS on Wednesday, bolstering its balance sheet by launching a marketing campaign for up to $1-billion of new capital.

TD Bank is selling a new instalment of what's known as innovative Tier 1 Capital - all the banks have sold these securities - that the bank brands as CaTS (Capital Trust Securities). It looks a lot like debt, and it is sold based on yield, but counts as equity in the eyes of regulators. TB Bank started its campaign with a $600-million target, but strong demand bumped the size of the offering to $1-billion.

Bank of Nova Scotia is also expected to tap this market - both banks are at the lower end of the spectrum when it comes to Tier 1 Capital ratios at Canadian banks.

TD Bank is selling two classes of CaTS, both of which have a provision meant to ensure the bank retires the securities in 10 years' time. This became a popular selling featuring on securities late last year, when Deutsche Bank broke with tradition by extending the life of securities that investors expected would be repurchased.

There is a new issue of $550-million of CaTS that pay a 9.253 per cent yield, and come due in 10 years' time. That's a premium of 676 basis points to the comparable Government of Canada bond. This issue resets at a spread of 1000 basis points to government debt if the securities are not retired in 2019, which gives the bank an enormous incentive to buy back the CaTS.

The second, $450-million tranche comes with a 10 per cent yield over the next 20 years, a premium of 649 basis points to the comparable government bond. Again, the spread soars to 975 basis points if this security is not retired in 2039.

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