(Bloomberg) — Investors searching for an edge in frothy credit markets are snatching up an obscure type of Canadian debt that’s already delivered some of the best returns among bonds.
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The securities — a type of Additional Tier 1 capital called Limited Recourse Capital Notes — have been issued by Canadian banks in recent years as a backstop to absorb capital losses if the bank runs into trouble, at which point they convert to equity. Known as LRCNS, the notes are mostly rated in the lower tier of investment grade, they have ultra-long maturities and are callable in as soon as five years after issuance.
Traditional credit investors have long expected banks to buy back the LRCNs at the earliest opportunity through calling them, to refinance the securities. But central bank rate hikes have made banks less interested in refinancing the debt, as calling certain LRCNs would often amount to replacing cheaper…
