TD Bank to sell $1.75B of debt in bonds

Toronto-Dominion Bank is looking to issue loss-absorbing junior securities just as investors become more open to buying bank bonds.

The Canadian lender plans to sell 60-year bonds that are callable after five years, according to people with knowledge of the matter. The securities, known as limited recourse capital notes, are eligible for the Canadian banks’ Additional Tier1reserve buffers and are expected to be rated at the second lowest investment grade by S&P Global Ratings and one step higher by Moody’s Investors Service.

The yield of a Bloomberg index grouping BBB rated dollar-denominated bonds issued was at 6.15 per cent Tuesday, down from 6.31 per cent reached Sept. 27, the highest level since 2010 as the financial stability came into greater focus. TD plans to go ahead with the deal as it’s expanding its footprint in U.S. retail banking and institutional capital markets by completing its acquisitions of brokerage Cowen Inc. and First Horizon Corp.

“I think they are trying to secure their most expensive funding now likely because they expect rates to go up even higher from here,” said Himanshu Bakshi, a New Yorkbased analyst at Bloomberg Intelligence.

AT1s, the riskiest form of bank debt, have been sold in various denominations in Europe, Asia and the U.S. The securities seek to transfer risk during times of firmlevel financial distress to creditors and potentially away from taxpayers.

LRCNs allow issuers tax deductions on interest payments — thus reducing their all-in borrowing costs. Under certain events, the notes can be converted into preferred shares, and ultimately into common equity.

Canada’s larger banks led by RBC started to sell the securities in 2020.

‘‘ They are trying to secure their most expensive funding now likely because they expect rates to go up.

HIMANSHU BAKSHI ANALYST