If a yield seems too good to be true ...

There are a couple of long-term bonds issued by Canadian banks that pay very high yields, and I’d like your opinion. For example, CIBC Capital Trust Tier 1 Notes – Series B currently yield close to 10 per cent. The notes mature on June 30, 2108, with the earliest call date of June 30, 2039. Locking in such a fantastic yield from a stable and strong Canadian bank seems like a no-brainer. Is there a catch?

Yup – a big one.

Let’s rewind to when these bonds were issued more than a decade ago.

During the financial crisis of 2008-09, Canadian Imperial Bank of Commerce and other banks needed to shore up their balance sheets. To attract capital from skittish investors, they issued notes with supersized yields. The coupon on the CIBC notes, for example, is a juicy 10.25 per cent.

The new securities were important to the banks, because they qualified as Tier 1 capital. This made them as good as equity when calculating the important Tier 1 Capital Ratio, which the banking regulator uses in determining whether the banks have the financial strength to ride out periods of extreme stress.

However, the status of the notes has since changed. Under the stricter regulatory framework known as Basel III that came in response to the financial crisis, the notes have been gradually phased out as Tier 1 capital and will no longer qualify as of the first quarter of the 2022 fiscal year, which for the banks begins on Nov. 1, 2021.

Rather than continue to pay a 10.25-per-cent coupon on $300-million of bonds that are no longer serving their initial purpose, CIBC would rather redeem them. Notwithstanding the original 2039 call date, CIBC reserved the right to redeem the notes at face value earlier if there was a “regulatory event” that affected the notes’ eligibility as Tier 1 capital.

And that’s exactly what CIBC intends to do. In February, 2020, the bank announced that, subject to regulatory approval, it “currently expects to exercise a regulatory event redemption right in its fiscal 2022 year … meaning that this redemption right could occur as early as November 1, 2021.”

CIBC isn’t alone. Toronto-Dominion Bank has said it also expects to exercise a regulatory event redemption right on its TD Capital Trust IV Notes – Series 2 as early as Nov. 1.

“They’re all going to go. They’re all dead,” James Hymas, president of Hymas Investment Management, said of the capital trust notes. The market has understood this for years, which is why the price of the bonds has gradually fallen.

Moral of the story: If something seems too good to be true, it probably is.

More investing book recommendations

After my column last week in which I recommended Lowell Miller’s The Single Best Investment: Creating Wealth with Dividend Growth, several readers wrote to share their favourite investing reads. I’ve listed four here, along with a brief description of the contents based on reviews and samples I read online.

• The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness, by Morgan Housel. Mr. Housel, a former investing columnist with The Wall Street Journal and now a partner with a venture capital fund, uses his knowledge of behavioural finance to show that success with money “has a little to do with how smart you are and a lot to do with how you behave,” he writes. Even “ordinary folks with no financial education can be wealthy if they have a handful of behavioural skills that have nothing to do with formal measures of intelligence.”
• The Most Important Thing: Uncommon Sense for the Thoughtful Investor, by Howard Marks. Mr. Marks, the billionaire co-founder of Oaktree Capital Management, based his book on a series of memos that he sent to clients over the years outlining his investment philosophy. The title is a bit misleading, as he discusses not one, but about 20 “most important things,” ranging from “understanding risk” to “finding bargains” to “appreciating the role of luck.” Mr. Marks’s memos – including a recent discussion of inflation – are available on Oaktree Capital’s website.
• The Elements of Investing: Easy Lessons for Every Investor, by Burton Malkiel and Charles Ellis. This compact book distills the wisdom of two octogenarian investing legends into 154 easy-to-read pages that are full of timeless advice. It’s not a stock-picking manual – the authors don’t believe anyone can consistently beat the market – but a common-sense guide that stresses saving, indexing and avoiding behavioural blunders that can sabotage an investing plan.
• The Naked Investor: Why Almost Everybody But You Gets Rich on Your RRSP, by John Lawrence Reynolds. If you’re working with an adviser, or thinking about handing your money over to one, consider this book essential reading. Filled with real-life examples, the book lifts the curtain on the conflicts of interest, shady tactics and outright abuses that pervade the investment industry and shows investors how to protect themselves and their money.

E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.

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