Great-West Turns to Growing Loonie Hybrid Debt for U.S. Venture


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(Bloomberg) — Great-West Lifeco Inc. plans to help finance its expansion in the U.S. by issuing limited recourse capital notes back home, taking advantage of the fast growing market for the Canadian dollar denominated securities first sold one year ago.

The Canadian insurer is buying Prudential Financial Inc.’s retirement business in the U.S. and aims to raise almost one-third of the $3.55 billion it’s paying by issuing loonie denominated limited recourse capital notes, or LRCNs. It would mark its inaugural sale of the securities following transactions from rivals such as Sun Life Financial Inc. and Manulife Financial Corp. earlier this year.

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Canadian banks and insurance companies have issued at least C$11.9 billion ($9.5 billion) of LRCNs since July 2020 when Royal Bank of Canada opened the market by issuing C$1.75 billion of 60-year notes which can be called after five years, Bloomberg data show. The securities, which are eligible for the financial institutions’ loss-absorbing buffers, allow issuers to a have tax deductions on the interest payment, so reducing their all-in borrowing costs.

“The market is comfortable in buying in size,” John van Boxmeer, a senior research analyst for global Fixed Income at CIBC Asset Management Inc., said Wednesday in an interview. The attractive coupons amid historically low yields are “part of the equation,” supporting the demand, he said.

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A potential Great-West 60-year LRCN offering callable after five years would have a coupon of around 3.6% if issued at this time, said Boxmeer. The transaction would be used to refinance a bridge loan provided by a Canadian bank, a representative of Great-West said in an emailed reply to questions.

Read more: Empire Life Tests LCRNs Debut Amid Yield Hunt

In June, Sun Life priced C$1 billion of LRCNs to yield 3.6% after getting an order book of around four times the deal amount, people familiar with the sale said at that time. The securities are quoted at a yield of 3.47%, according to Bloomberg bid prices Wednesday. In February Manulife also priced C$2 billion of the notes.

While the market for LRCNs is rapidly expanding and already accounts for roughly 10% of the yearly issuance of Canadian dollar denominated corporate bonds, it’s still at an early stage, said Boxmeer. Partly because first investors need to see how the market reacts should some of instruments not be called after five years, meaning their duration would be significantly extended, he said. Such events in other markets have prompted a pickup in volatility.

“It’s possible that it might be called in five years’ time, but its also very possible that this could be a 60-year or perpetual instrument,” under certain circumstances, said Boxmeer. “We’re very conscious of that and I think the market is as well.”

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