The Next Generation Of Regulatory Capital Has Arrived In Canada

A number of Canadian banks, including Royal Bank, National Bank, Bank of Montreal and CIBC, have recently issued "limited recourse capital notes", or LRCNs, in public offerings to institutional investors, starting with RBC in July 2020.

Structure of the Limited Recourse Capital Notes

• The LRCN structure consists of two instruments (1) deeply subordinated interest-paying LRCNs, with a term to maturity of at least 60 years, that are issued by the bank directly to investors, and (2) perpetual, non-cumulative preferred shares that are issued by the bank to a trust to satisfy the recourse of LRCN holders upon the occurrence of certain prescribed events.
• The legal form of the LRCN is debt, with a dated maturity. The initial interest rates on the LRCNs have been in the range of 4.30%-4.50%, and the payout resets every five years at the initial credit spread over the prevailing five-year Government of Canada yield. The dividend rate on the preferred shares matches