Insights   |   Apr 19, 2023

Finding Value Across the Capital Structure: Limited Recourse Capital Notes

Limited Recourse Capital Notes, or simply LRCNs, are a growing segment of the Canadian fixed-income landscape that offer higher yields than comparable traditional investment-grade bonds.

Photo Nicolas Normandeau
Portfolio Manager, Fixed Income
Jasper Beerepoot
Jasper Beerepoot
Associate Portfolio Manager and Head of Credit Research, Fixed Income
Photo Jason Carvalho
Senior Capability Specialist, Fixed Income

Plainly, LRCNs are interest-bearing instruments issued by Canadian financial institutions that share similar characteristics with preferred shares. They provide bond investors with a natural higher-yielding debt option of familiar high-quality entities. To obtain these higher yields, investors must move down the issuer’s capital structure.

Higher yields are the result of higher associated risks, which include lower capital priority, increased complexity, lower liquidity, and higher volatility than traditional bonds. At Fiera Capital, we believe LRCNs can play a return enhancement role in fixed-income portfolios, but a measured and disciplined approach is required.

Since the introduction of LRCN instruments in 2020, it has become abundantly clear this is not a homogenous asset class, evidenced by wide performance deviations – not only between issuers but also across LRCN securities of a single issuer. In some instances, the return profiles of LRCNs have been more emblematic of preferred shares or equities. Investors are left to ponder; Is it a bond?


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