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BMO prints new deal as banks explore index alternatives

09 July 2021

This week Bank of Montreal printed a new USD.1.7bn dual-tranche deal alongside two other multi-tranche bank trades - Mizuho’s USD1.75bn dual-tranche and Nomura’s USD3.25bn triple-tranche - as the only issuers to hit the markets the day after the Independence Day holiday.

Demand was driven by the market tone as banks seized the window of opportunity to issue as soon as they could according to syndicates, coupled with borrowers’ preference for short tenors. However, BMO’s deal comes at a time when banks are looking to alternative credit sensitive indexes in the floating rate space for their deals, potentially hinting at more to come.

Domestic demand…

IPTs for BMO’s new trade were announced on the morning of 06 July with USD 3-year fixed and 3-year FRN tranches at T+45bp area and SOFR equivalent respectively. Guidance saw the spread tighten further to T+30bp area with a tolerance range of +/-3bp for the fixed tranche, whilst the FRN remained at SOFT equivalent. At launch the fixed tranche was squeezed to the tightest end of the tolerance range at T+27bp as the FRN was pegged at SOFR+32bp. Sizes were also unveiled at the time with USD1.15bn printed on fixed tranche and USD550m on the FRN.

Demand was skewed towards the 3-year fixed with final books reported at USD1.6bn, alongside USD700m for the FRN, according to a syndicate banker involved with the transaction.

International investors were involved in the new trade, with the same syndicate banker citing a “good amount of foreign demand”, however take-up was mainly driven by domestic investors for their capital allotments. Demand was largely motivated by accounts across the investor base snapping up the new trade as they recalibrated their bank holdings for financial allocations held in their portfolios.

For comparables, the leads looked to Canadian banks similar to BMO. “The main comp we were pointing to was the most recent Canadian 3-year which was the BNS [Bank of Nova Scotia] 0.70% 2024s” stated a lead, “and we had that at T+23/G+27bp”, with the syndicate deciding not to look too closely at BMO’s existing curve but preferring more liquid trades elsewhere.

“The old BMO 2024s were not terribly helpful because they are two years old and not too liquid, but we had those at G+22bp”, explained the same banker. For reference, the banker was referring to BMO’s USD1bn 2.50% 2024s executed in 2019, which was seen trading at around T+26bp at the time of the new deal’s pricing, according to Trace data.

Ultimately, the syndicate landed on Bank of Nova Scotia as a leading comparable due to the similar credit profiles, with both banks rated A2/A-/AA-, the leads opting out of selecting higher rated peers such as Toronto Dominion (Aa3/A) and Royal Bank of Canada (A2/A).

NICs were flat purely based on the main BNS comp the syndicate referenced earlier, falling in line with market expectations for Canadian bank trades “as the market just sort of clumps the Canadians all together within a pretty tight range”, a different source commented.

The new BMO fixed notes were trading around 3bp inside the launch spread on Thursday, with the FRN seen trading at 100.031 (versus par reoffer), according Trace data.

Banks eye up alternatives

Bank of Montreal’s latest 3-year SOFR FRN marks the third such SOFR deal in the bank’s debt history. The new SOFR tranche marks a shift from the previously used floating rate LIBOR benchmark, the last such issue being the USD500m L+57 March 2022s printed in March 2019.

“I think we've fully departed from LIBOR at this point”, commented a banker involved with the new issue. Syndicates have suggested to Bond Radar the move into the overnight rate from LIBOR going forward will equip them with a more suitable risk management tool to manage their interest rate exposures.

However, syndicates are also considering alternatives to SOFR as a short-term forward rate index for their new bank deals, opening up new options for hedging interest rate-sensitive trades. “We are open to both BSBY and SOFR as an index” suggested the same syndicate when asked if banks would look to issue using SOFR again after BMO’s new deal.

BSBY - the Bloomberg Short-Term Bank Yield Index - aims to measure future rates based on “the average yields at which large global banks access USD senior unsecured marginal wholesale funding”, according to Bloomberg’s BSBY press release. “Since it is based on bank funding levels that Bloomberg calculates, it is a better replacement for LIBOR”, opined a banker not involved in this week’s deals.

For one other banker, the appeal lies in the optionality and the credit component the BSBY index offers. “It’s another option out there”, suggested the banker, as the availability and variety between overnight rate products will aid bankers with alternative methods for price discovery for their new bonds.

In terms of the credit component, the SOFR overnight rate paid 0.05% at the time of BMO’s pricing, according to Federal Reserve Bank of NY data. Meanwhile the overnight BSBY offered 0.082% at the time of the recent transaction.

So far in the dollar market, only two stand-alone issuers have tapped the public market with BSBY trades since the index’s inception, according to Bond Radar records - US Bancorp’s USD1bn BSBY+17 2021s and BofA’s USD1.25bn BSBY+43 2024s – printed in May and June of this year, respectively.

“Demand for the short end”

The new deal also aligned closely with syndicates’ expectations in terms of pricing due to market demand for the short end of the curve. “Demand in the front end was a key driving factor”, suggested one lead, as corporates and financials pushed for shorter tenors in the investment grade market. Borrowers and investors alike have been targeting tenors “3-years and below” as of late according to a market participant, increasing supply for these tenors in comparison to last year.

The Bond Radar graphics below shows new issues that have come to market year-to-date with tenors of less than 3-years, relative to all maturities during the same period, in comparison to FY 2020.





2021 year-to-date has printed a total of USD162.47bn of new issues that will mature on 31 December 2024 and prior (i.e. tenors of 3-years and below) versus a total of USD813.28bn for all maturities. Therefore, this year’s short tenors make up 19% of all issuance so far.

For reference, the chart above shows all maturities FY 2020. Using the same parameters in terms of maturities for 2021, 2020 FY added USD207.99bn at 3-years or less (maturing on 31 December 2023 or before). Relative to the mammoth FY 2020 total of USD1.73trn, short tenors made up just 12% therefore.

However, it is worth mentioning on a relative quarter-on-quarter basis for 2021 there was a marginal drop for issues which printed at the front end of the curve (3-year and below). Q1 2021 added USD97.77bn for a quarterly total of USD434.7bn, encompassing 22% of all maturities. Meanwhile Q2 2021 short-end trades made up 17% relative to a quarterly total of USD362.88bn.


BMO pricing terms:

Tranche A: USD1.15bn, coupon 0.625%, due 09 July 2024. Reoffer 99.8460, spread T+27bp, yield 0.677%.

Tranche B: USD550m, coupon SOFR+32bp, due 09 July 2024. Reoffer 100.00, spread SOFR+32bp.

Common terms: SEC registered. Senior unsecured notes. Subject to bail-in conversion under Canadian Bail-in regulations. Fixed and/or FRN basis. Settle T+3. MWC. UOP: GCP. Denoms 2k/1k. Ratings A2/A-/AA-. Leads BMO, BofA, JPM, MS and WFS.



Domestic demand…

IPTs for BMO’s new trade were announced on the morning of 06 July with USD 3-year fixed and 3-year FRN tranches at T+45bp area and SOFR equivalent respectively. Guidance saw the spread tighten further to T+30bp area with a tolerance range of +/-3bp for the fixed tranche, whilst the FRN remained at SOFT equivalent. At launch the fixed tranche was squeezed to the tightest end of the tolerance range at T+27bp as the FRN was pegged at SOFR+32bp. Sizes were also unveiled at the time with USD1.15bn printed on fixed tranche and USD550m on the FRN.

Demand was skewed towards the 3-year fixed with final books reported at USD1.6bn, alongside USD700m for the FRN, according to a syndicate banker involved with the transaction.

International investors were involved in the new trade, with the same syndicate banker citing a “good amount of foreign demand”, however take-up was mainly driven by domestic investors for their capital allotments. Demand was largely motivated by accounts across the investor base snapping up the new trade as they recalibrated their bank holdings for financial allocations held in their portfolios.

For comparables, the leads looked to Canadian banks similar to BMO. “The main comp we were pointing to was the most recent Canadian 3-year which was the BNS [Bank of Nova Scotia] 0.70% 2024s” stated a lead, “and we had that at T+23/G+27bp”, with the syndicate deciding not to look too closely at BMO’s existing curve but preferring more liquid trades elsewhere.

“The old BMO 2024s were not terribly helpful because they are two years old and not too liquid, but we had those at G+22bp”, explained the same banker. For reference, the banker was referring to BMO’s USD1bn 2.50% 2024s executed in 2019, which was seen trading at around T+26bp at the time of the new deal’s pricing, according to Trace data.

Ultimately, the syndicate landed on Bank of Nova Scotia as a leading comparable due to the similar credit profiles, with both banks rated A2/A-/AA-, the leads opting out of selecting higher rated peers such as Toronto Dominion (Aa3/A) and Royal Bank of Canada (A2/A).

NICs were flat purely based on the main BNS comp the syndicate referenced earlier, falling in line with market expectations for Canadian bank trades “as the market just sort of clumps the Canadians all together within a pretty tight range”, a different source commented.

The new BMO fixed notes were trading around 3bp inside the launch spread on Thursday, with the FRN seen trading at 100.031 (versus par reoffer), according Trace data.

Banks eye up alternatives

Bank of Montreal’s latest 3-year SOFR FRN marks the third such SOFR deal in the bank’s debt history. The new SOFR tranche marks a shift from the previously used floating rate LIBOR benchmark, the last such issue being the USD500m L+57 March 2022s printed in March 2019.

“I think we've fully departed from LIBOR at this point”, commented a banker involved with the new issue. Syndicates have suggested to Bond Radar the move into the overnight rate from LIBOR going forward will equip them with a more suitable risk management tool to manage their interest rate exposures.

However, syndicates are also considering alternatives to SOFR as a short-term forward rate index for their new bank deals, opening up new options for hedging interest rate-sensitive trades. “We are open to both BSBY and SOFR as an index” suggested the same syndicate when asked if banks would look to issue using SOFR again after BMO’s new deal.

BSBY - the Bloomberg Short-Term Bank Yield Index - aims to measure future rates based on “the average yields at which large global banks access USD senior unsecured marginal wholesale funding”, according to Bloomberg’s BSBY press release. “Since it is based on bank funding levels that Bloomberg calculates, it is a better replacement for LIBOR”, opined a banker not involved in this week’s deals.

For one other banker, the appeal lies in the optionality and the credit component the BSBY index offers. “It’s another option out there”, suggested the banker, as the availability and variety between overnight rate products will aid bankers with alternative methods for price discovery for their new bonds.

In terms of the credit component, the SOFR overnight rate paid 0.05% at the time of BMO’s pricing, according to Federal Reserve Bank of NY data. Meanwhile the overnight BSBY offered 0.082% at the time of the recent transaction.

So far in the dollar market, only two stand-alone issuers have tapped the public market with BSBY trades since the index’s inception, according to Bond Radar records - US Bancorp’s USD1bn BSBY+17 2021s and BofA’s USD1.25bn BSBY+43 2024s – printed in May and June of this year, respectively.

“Demand for the short end”

The new deal also aligned closely with syndicates’ expectations in terms of pricing due to market demand for the short end of the curve. “Demand in the front end was a key driving factor”, suggested one lead, as corporates and financials pushed for shorter tenors in the investment grade market. Borrowers and investors alike have been targeting tenors “3-years and below” as of late according to a market participant, increasing supply for these tenors in comparison to last year.

The Bond Radar graphics below shows new issues that have come to market year-to-date with tenors of less than 3-years, relative to all maturities during the same period, in comparison to FY 2020.





2021 year-to-date has printed a total of USD162.47bn of new issues that will mature on 31 December 2024 and prior (i.e. tenors of 3-years and below) versus a total of USD813.28bn for all maturities. Therefore, this year’s short tenors make up 19% of all issuance so far.

For reference, the chart above shows all maturities FY 2020. Using the same parameters in terms of maturities for 2021, 2020 FY added USD207.99bn at 3-years or less (maturing on 31 December 2023 or before). Relative to the mammoth FY 2020 total of USD1.73trn, short tenors made up just 12% therefore.

However, it is worth mentioning on a relative quarter-on-quarter basis for 2021 there was a marginal drop for issues which printed at the front end of the curve (3-year and below). Q1 2021 added USD97.77bn for a quarterly total of USD434.7bn, encompassing 22% of all maturities. Meanwhile Q2 2021 short-end trades made up 17% relative to a quarterly total of USD362.88bn.


BMO pricing terms:

Tranche A: USD1.15bn, coupon 0.625%, due 09 July 2024. Reoffer 99.8460, spread T+27bp, yield 0.677%.

Tranche B: USD550m, coupon SOFR+32bp, due 09 July 2024. Reoffer 100.00, spread SOFR+32bp.

Common terms: SEC registered. Senior unsecured notes. Subject to bail-in conversion under Canadian Bail-in regulations. Fixed and/or FRN basis. Settle T+3. MWC. UOP: GCP. Denoms 2k/1k. Ratings A2/A-/AA-. Leads BMO, BofA, JPM, MS and WFS.