Bloomberg News

RBC Begins Disclosing Structured-Note Value Before SEC Guidance

February 14, 2013

Royal Bank of Canada started disclosing the estimated initial value of its structured notes in the U.S., becoming at least the third bank to do so before expected regulatory guidelines.

The bank included the figure for $18.5 million of one-year securities tied to MetLife Inc. that were sold on Feb. 6. The Toronto-based issuer estimated the value at 97.4 cents on the dollar, according to a prospectus filed with the U.S. Securities and Exchange Commission. The notes yield 6.5 percent as long as the price doesn’t fall below 5.35 percent of the stock’s starting value, with 94.65 percent of capital at risk.

Bank of America Corp. distributed the securities for a 1.75 percent fee.

The estimated value is reduced by distribution fees, hedging costs and the bank’s use of a more favorable borrowing rate than available for plain-vanilla bonds, according to the prospectus. Banks create structured notes by packaging debt with derivatives to offer customized bets to retail investors while earning fees and raising money.

The SEC plans to require banks to disclose an estimated initial value of the securities in offering documents, according to a report from law firm Morrison & Foerster LLP last month that didn’t specify when issuers must adopt the new rules.

The regulator asked issuers in April how they value their notes and how they create secondary markets for the illiquid securities. Goldman Sachs Group Inc. started including estimated initial values in offering documents the next month, while Bank of America followed in October.

Kait Conetta, a spokeswoman for the Royal Bank of Canada, declined to comment.

Derivatives are contracts whose value is derived from stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.

To contact the reporter on this story: Kevin Dugan in New York at kdugan4@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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