TD's AT1 CAD LRCN Issue: Enhancing Capital Adequacy and Stability

TD Bank Group (TD) recently announced the issuance of C$750 million of 5.909% Non-Viability Contingent Capital ("NVCC") Additional Tier 1 ("AT1") Limited Recourse Capital Notes, Series 5 (LRCNs). This move is a strategic step by TD to bolster its capital adequacy ratios and ensure financial stability. Let's delve into the details of this issuance and its implications for TD and the broader market.

The 5.909% interest rate of TD's LRCNs is competitive with recent AT1 bond issues by TD and its peers. In 2024, TD issued 7.250% LRCNs in the U.S. and 5.700% AT1 Perpetual Notes in Singapore. In 2021 and 2022, TD issued LRCNs with interest rates of 3.600% and 8.125%, respectively. Peer banks have also issued AT1 bonds with varying interest rates, such as 5.500% by Royal Bank of Canada in 2023 and 6.500% by Bank of Montreal in 2022. The 5.909% rate for TD's LRCNs aligns with market conditions and investor expectations, considering the 5-year Government of Canada Yield and the spread added by TD.

The issuance of LRCNs will enhance TD's capital adequacy ratios, as these notes are considered Additional Tier 1 (AT1) capital for regulatory purposes. AT1 capital is designed to absorb losses before common equity, improving TD's loss-absorbing capacity and strengthening its ability to meet regulatory requirements. This issuance will help TD maintain its capital ratios above the regulatory minimum, ensuring its financial stability and resilience.

The limited recourse feature of TD's LRCNs reduces the risk to TD's core capital by limiting the recourse of LRCN holders to their proportionate share of the Limited Recourse Trust's assets, which consist of Preferred Shares Series 32. This structure protects TD's core capital from losses in the event of non-payment of interest or principal on the LRCNs, enhancing the stability and predictability of TD's capital structure.

In conclusion, TD's issuance of AT1 CAD LRCNs is a strategic move that aligns with market conditions and investor expectations. This issuance will enhance TD's capital adequacy ratios, strengthen its financial stability, and reduce risks to its core capital. As an investor, I would consider this issuance a positive development for TD, as it demonstrates the bank's commitment to maintaining a strong capital position and ensuring the long-term stability of its operations.