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The Canadian Bank Bonds That Are About To Go Mainstream

Jul. 02, 2017 12:13 AM ET3 Comments
Aubrey Basdeo profile picture
Aubrey Basdeo

Originally published June 27, 2017

Canadian fixed income investors may soon be holding a new kind of bond in their portfolios after it was recently announced that bail-in and non-viable contingent capital (NVCC) bonds issued by Canada's banks and life insurers will be eligible for inclusion in the FTSE TMX Canada Universe Bond Index starting next month.

FTSE Russell, the global index provider, said earlier this month that it expects bail-in bonds to become eligible upon confirmatory review of their final structure and once issued by a Canadian financial institution, while NVCC bonds that are newly issued on or after July 1, 2017 will become eligible effective that same date.

While not out of the blue, the decision has generated some buzz, particularly among investors with exposure to FTSE TMX fixed income indices via ETFs or other index products. One of the main queries we've been hearing from clients is simply, "What are these relatively new types of bond issues and how do they work?" To help answer those questions and more, here below is a short FAQ covering the basics on bail-in and NVCC bonds in hopes of providing a better understanding of two investments that could become a bigger part of portfolios in Canada.

What are bail-in and NVCC bonds?

Bail-in capital bonds and non-viable contingent capital (NVCC) bonds are distinct from existing debt issued by financial institutions primarily because they are both designed to convert into common equity in the event that regulators determine an institution is no longer viable. As for the distinction between the two, bail-in bonds are more senior in the capital structure to NVCC bonds, and would be converted to equity only after NVCC bonds have been converted.

Why were they introduced in Canada?

Both bail-in and NVCC bonds are structured to help

This article was written by

Aubrey Basdeo profile picture
Aubrey Basdeo, Head of Canadian Fixed Income, is a member of the Product Strategy Team within BlackRock's Model-Based Fixed Income Portfolio Management Group. He leads the product strategy effort in Canada for both the Institutional and iShares businesses. Mr. Basdeo's service with the firm dates back to 2005, including his years with Barclays Global Investors (BGI), which merged with BlackRock in 2009. At BGI, Mr. Basdeo was the head of the Canadian fixed income business and was responsible for both the management of the Canadian institutional and iShares assets as well as delivering fixed income strategies and solutions to BGI clients. Prior to joining BGI in 2005, he was the head of the Relative Value Fixed Income Group at Ontario Teachers' Pension Plan where he led a team of 6 Portfolio Managers and Analysts responsible for managing the Plan's fixed income assets. Mr. Basdeo earned a BSc in engineering from the University of Waterloo in 1983, and an MBA from the University of Toronto in 2003.

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