BMO Raises US$1 Billion at 7.375% as Canadian Bank Taps U.S.-Dollar Capital Market

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Bank of Montreal is reaching deep into the U.S.-dollar capital market with a financing that carries an eye-catching price. BMO has priced US$1 billion of Additional Tier 1 limited recourse capital notes at an annual interest rate of 7.375%, giving one of Canada’s largest banks a fresh layer of regulatory capital while locking in a substantial funding cost for the next decade.

The transaction is more complicated than a conventional bond sale. The securities are designed to absorb losses under extreme circumstances and sit lower in BMO’s capital structure than ordinary senior debt. For investors, the higher yield compensates for those additional risks. For BMO, the deal provides regulatory capital and financial flexibility at a time when its North American banking operations remain large, profitable and increasingly interconnected with U.S. markets.

The US$1 Billion Deal Comes With a Meaningful Price Tag

BMO priced US$1 billion of Series 7 non-viability contingent capital Additional Tier 1 limited recourse capital notes on September 8. The securities carry a 7.375% annual interest rate, with payments scheduled quarterly. The expected closing date is September 16, making the transaction another sizable institutional capital raise by one of Canada’s systemically important banks.

That 7.375% coupon translates into roughly US$73.75 million of annual interest at the full US$1 billion principal amount, or about US$18.44 million per full quarterly payment period. The pricing term sheet shows the notes were sold at 100% of principal, while the underwriting commission was set at 1%. That leaves BMO with approximately US$990 million in proceeds after the underwriting commission and before other offering expenses. In other words, the headline US$1 billion represents the gross principal raised, while the amount immediately available to the bank after underwriting costs is somewhat lower.

Why Investors Are Being Paid 7.375%

The coupon looks high beside ordinary government borrowing costs, but these securities carry substantially more risk than U.S. Treasuries or senior bank bonds. BMO’s pricing documents used a U.S. Treasury security maturing in August 2036 as the initial benchmark. That security was yielding 4.796% when the transaction was priced, and the BMO notes were offered at a spread of 257.9 basis points above that benchmark, producing the 7.375% re-offer yield.

That spread is important because investors are not simply lending money to BMO for ten years. They are purchasing deeply subordinated capital designed to absorb losses if the bank encounters severe financial distress. The pricing term sheet listed expected ratings of BBB- from S&P and Baa3 with a hybrid designation from Moody’s. Those ratings are below the senior ratings typically associated with major banks because the security occupies a riskier position in the capital structure. The higher coupon is therefore compensation for subordination, complex loss-absorption features, long duration and uncertainty over when the notes will ultimately be redeemed.

The Fixed Rate Lasts Until 2036, Then the Math Changes

BMO has effectively locked in the 7.375% rate for slightly more than a decade. The initial fixed-rate period runs from the September 2026 issue date until November 26, 2036. After that point, the coupon will reset every five years using the prevailing five-year U.S. Treasury rate plus 2.579 percentage points. That structure means the future cost of the securities will move with U.S. interest rates rather than staying permanently fixed at 7.375%.

The legal maturity is even further away: November 26, 2086, giving the notes a 60-year term. Few investors buying them today are likely to think of 2086 as the practical investment horizon, however. Beginning November 26, 2036, BMO can seek to redeem the securities on quarterly interest-payment dates. Any redemption requires the prior written approval of Canada’s Superintendent of Financial Institutions. That distinction matters. Investors cannot assume BMO will automatically call the notes at the first opportunity simply because the initial fixed-rate period has ended.

These Are Capital Instruments, Not Ordinary Bank Bonds

The words “limited recourse” are central to understanding what BMO sold. Alongside the notes, BMO will issue Series 56 non-cumulative fixed-rate-reset preferred shares that will be held by Computershare Trust Company of Canada as trustee for the BMO LRCN Trust. Under normal circumstances, investors receive interest on the notes just as they would with other fixed-income securities. The structure changes dramatically under specified stress events.

If BMO fails to make required payments, enters certain default circumstances or experiences a regulatory non-viability trigger, investors do not simply stand alongside ordinary creditors with an unrestricted claim on the bank. Their recourse is limited to their proportionate interest in assets held by the trust. Those assets initially consist of the associated preferred shares. Under a non-viability event, the preferred shares can ultimately convert into BMO common shares according to the contractual mechanism. This loss-absorbing design explains why the instrument can count toward bank capital and why its yield is considerably higher than safer forms of bank borrowing.

Why Regulators Count the Notes as Additional Tier 1 Capital

Additional Tier 1 capital sits between common equity and more conventional forms of subordinated or senior debt in a bank’s financial structure. International Basel standards describe AT1 as “going-concern” capital—money intended to remain available to absorb losses while a bank is still operating. Canada’s Office of the Superintendent of Financial Institutions has specifically ruled that properly structured limited recourse capital notes can qualify as AT1 capital.

The Canadian structure is unusual because the notes themselves have a 60-year maturity even though regulatory AT1 capital is supposed to behave economically like perpetual capital. OSFI concluded that the structure satisfies that requirement because investors’ ultimate recourse is to perpetual preferred shares or common equity rather than an unconditional cash repayment from the bank. OSFI also restricts LRCNs to institutional investors and requires minimum denominations of at least $200,000. Those rules underline that this is a sophisticated capital-market product, not a conventional retail bond designed for ordinary savings portfolios.

BMO Entered the Deal With a Capital Cushion Above OSFI’s Target

The timing does not suggest BMO was scrambling to repair a depleted common-equity position. At July 31, 2026, BMO reported a Common Equity Tier 1 ratio of 13.0%. That was unchanged from the previous quarter and stood above the 11.0% supervisory expectation currently applied by OSFI to Canada’s domestic systemically important banks. OSFI lowered that sector-wide expectation in June after reducing the Domestic Stability Buffer to 3.0% from 3.5%.

BMO’s latest earnings also showed substantial underlying profitability. Third-quarter reported net income was C$1.75 billion, while adjusted net income reached C$2.86 billion, up 19% from a year earlier. Reported earnings were affected by a large charge related mainly to goodwill associated with the planned sale of Transportation Finance and Vendor Finance operations. Against that backdrop, the new AT1 issuance looks less like an emergency funding exercise and more like active management of the bank’s capital stack—adding loss-absorbing capacity while preserving flexibility over common equity, lending, dividends and other capital decisions.

The U.S.-Dollar Choice Fits BMO’s North American Footprint

Issuing the securities in U.S. dollars also makes strategic sense for a bank with a substantial American operation. BMO reported that U.S. Banking generated C$868 million of net income in its third quarter, up 13% from a year earlier. Measured in U.S. dollars, reported U.S. Banking profit was US$620 million, with revenue rising 5%. BMO said commercial loan growth continued in both Canada and the United States during the quarter.

The broader institution had approximately C$1.5 trillion of total assets as of July 31, highlighting the scale at which funding and capital decisions have to be managed. A bank operating across two major currencies cannot rely solely on one domestic investor base for every layer of its balance sheet. Accessing the U.S.-dollar institutional market broadens the pool of potential capital buyers while creating capital in the currency of BMO’s largest foreign market. The issuance does not, by itself, reveal how BMO will allocate individual dollars internally, but it demonstrates continued access to a deep international market for bank capital.

BMO Has Wide Flexibility Over Where the Money Goes

BMO has not earmarked the proceeds for a single acquisition, lending program or investment. Instead, the bank says the money will enter its general funds and can be used for general banking purposes. Those purposes may include redeeming existing capital securities or repaying other outstanding liabilities. That language gives management considerable room to adjust the balance sheet as market conditions and regulatory requirements evolve.

The economics make that flexibility valuable because AT1 capital is not cheap. A 7.375% coupon creates a sizable recurring financing expense, so management has an incentive to use the capital efficiently and to compare its cost with other available instruments over time. Starting in November 2036, BMO may seek regulatory approval to redeem the notes, particularly if equivalent replacement capital becomes cheaper. OSFI’s rules, however, are designed to prevent banks from treating an expected call date as a guaranteed maturity. Regulators must remain satisfied that the bank will retain sufficient high-quality capital after any redemption.

What the Transaction Tells Investors About Bank Funding in 2026

The offering is a reminder that a bank can be profitable, well-capitalized and still pay a relatively high headline interest rate when it raises specialized regulatory capital. BMO’s 7.375% coupon should not be confused with the price it would necessarily pay for deposits, covered bonds or ordinary senior debt. AT1 securities command a premium precisely because investors accept subordination, long duration and the possibility of having their claim transformed in a severe stress scenario.

The transaction also shows how mature the Canadian LRCN market has become since OSFI first allowed the structure in 2020. BMO was able to place US$1 billion through a syndicate led by BMO Capital Markets, Barclays, Citigroup, Goldman Sachs, Morgan Stanley and UBS. The notes were structured with a US$200,000 minimum denomination, reinforcing their institutional focus. If the financing closes as expected on September 16, BMO will have added another substantial layer of loss-absorbing capital while paying a price that reflects both today’s higher U.S. interest-rate environment and the additional risks AT1 investors are being asked to carry.

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