Fixed Income   |   Sep 2, 2020

Limited Recourse Capital Notes: a present for preferred share investors

Preferred shares, contrary to the other traditional fixed-income asset classes, are appealing for their upside potential in rising rate environments. But with the odds of the Bank of Canada hiking its benchmark rate in the short-term virtually null, the market isn’t counting on rising benchmark rates to help drive preferred share returns in the near-term.

Nicolas Normandeau
Vice President and Portfolio Manager, Fixed Income

However, Christmas came early for preferred share investors when, on July 21, RBC issued Limited Recourse Capital Notes (LRCNs), a first-of-a-kind hybrid product that, while technically a debt security, count as Additional Tier-1 (AT-1) capital and will lead to important structural changes for the preferred share market over the coming years. Despite the market’s prompt response and preferred share indices having gained about 6% since RBC’s roadshow on July 15,¹ we believe that the asset class still provides an attractive opportunity for Canadian investors.

A game changer for the preferred share market

The preferred share market has rallied, as investors priced-in that all banks’ preferred shares with reset spreads of 380 basis points or more will be redeemed.² Yet we believe the market is still not taking into account the full redemption story, which in our opinion will be supportive for the asset class for years to come.

[…]

Related Insights

Alternatives
Sep 17, 2020

Exploring Non-Traditional Income – Are private markets the solution for modern income challenges?

We review the implications of today’s ultra-low yield environment and the changing opportunity set in private markets.
Fixed Income
Sep 14, 2020
9:48

Active and Strategic Fixed Income Team – Strategy Update

Jean-Guy Mérette, Vice President and Portfolio Manager, Active and Strategic Fixed Income Team, talks about his results for the first half of 2020 and his positioning and outlook for the remaining of the year.
Jean-Guy Mérette
Vice President and Portfolio Manager, Fixed Income