Date Closed

July 28, 2020

Lead Office

Toronto

Value

1.75 Billion CAD

On July 28, 2020, a syndicate of agents co-led by RBC Capital Markets and J.P. Morgan Securities completed an offering of C$1.75 billion aggregate principal amount of 4.50% Limited Recourse Capital Notes, Series 1 (Non-Viability Contingent Capital) (NVCC) issued by Royal Bank of Canada (the “Offering”).

The Offering represents the inaugural offering in Canada of limited recourse capital notes (“LRCNs”), a new type of debt instrument available only to institutional investors that is treated similar to equity by federal regulators for the purpose of calculating regulatory capital requirements. LRCNs are additional tier 1 (“AT1”) capital intended to foster a more liquid and global institutional market for Canadian bank AT1 capital than previously existed and to allow issuers to pursue opportunities aimed at strengthening their overall capital position. This new form of AT1 capital is intended to be a marketable debt instrument that can be issued in multiple currencies and geographies that is competitive internationally and that allows federally regulated financial institutions to optimize the fulfilment of their AT1 capital requirements.

The innovative LRCN structure consists of two instruments: (1) deeply subordinated interest-bearing LRCNs with a term to maturity of 60 years issued by the issuer directly to investors; and (2) perpetual, non-cumulative preferred shares of the issuer (the “Preferred Shares”) issued to a special purpose vehicle (the "Limited Recourse Trust") for the benefit of LRCN holders. In case of non-payment of interest on or principal of the LRCNs when due, the recourse of each LRCN holder will be limited to that holder's proportionate share of the Limited Recourse Trust's assets, which will consist of Preferred Shares except in limited circumstances.

The success of the Offering opened the door to a number of other banks who have since completed similar offerings of LRCNs. It is anticipated that OSFI-regulated insurance companies may also begin to issue LRCNs in 2021.

McCarthy Tétrault advised a syndicate of agents for the Offering with a team led by Andrew Parker and Jo-Anna Brimmer that included Barry Ryan, Suzie Cusson (Business), and Gabrielle Richards and Kabir Jamal (Tax). The whole McCarthy’s team was intimately involved in bringing this inaugural offering of LRCNs to market including assisting the Royal Bank of Canada team with refining the product before the launch.