Borrowers are on track to sell a record amount of high-yield bonds in Canadian dollars this year as investors seek to reduce currency risk and replace income trusts.
Videotron Ltd. and Corus Entertainment Inc. were among sellers of more than C$1.5 billion ($1.4 billion) of non- investment grade debt in the first half of the year, up from about C$1.2 billion for all of 2009, said Joanna Zapior, head of corporate debt research at Canadian Imperial Bank of Commerce.
“That quest for yield has really supported demand for Canadian-dollar high-yield issues,” Zapior said in a phone interview from Toronto. “The pace of issuance has been intense over the past 12 months.”
Investors are buying non-investment grade, or junk, bonds with interest rates close to record lows, and as the tax advantage for income trusts is set to expire Dec. 31. Income trusts are securities that distribute most of their cash flow to investors in monthly payouts, with average yields of 8 percent for companies on the Standard & Poor’s/TSX Income Trust Index.
Increased investor demand has helped fuel expectations for the emergence of a Canadian-dollar junk bond market, said Ed Sustar, a senior credit analyst at Moody’s Investors Service in Toronto. Most of the $10 billion of high-yield debt Canadian companies sold last year was in U.S. dollars and swapped back into the Canadian currency, he said.
“There’s pressure from all sides -- the buyers, the issuers and the arrangers -- to make this market work,” Sustar said in an interview. “The issuers love it and investors really want to invest in Canadian dollars without the currency risk.”
Canadian companies sold a record C$1.8 billion of Canadian- dollar high-yield bonds in 2007, according to Robert Follis, head of corporate debt research at the Bank of Nova Scotia.
Canadian high-yield debt returned 11.4 percent in the first six months of the year including interest payments, according to a Bank of America Merrill Lynch index.
Elsewhere in credit markets, the Bank of Canada will sell C$3 billion of 2 percent bonds maturing in September 2012 today. The central bank’s June 2 auction of C$2 billion of 2-year securities drew an average yield of 1.928 percent, and a bid-to- cover ratio of 2.395, according to data on the bank’s website.
Potash Corp. of Saskatchewan Inc., the world’s biggest fertilizer producer, filed a registration statement with the U.S. Securities and Exchange Commission for $2 billion of debt securities, according to the prospectus.
Research by CIBC’s Zapior suggests that publicly traded Canadian companies and income trusts that have not yet sold debt have the financial strength to sell as much as C$65 billion of high-yield securities.
The study of companies traded on the Toronto Stock Exchange found 185 with potential to sell debt rated between BBB and BB, said Zapior, who declined to put a time limit on the possible issuance.
“This gives us a good feel that companies that haven’t issued debt are a viable pool of potential supply,” Zapior said. “Supply of this higher-yield debt is probably not going to be an issue.”
Zapior said record issuance of Canadian-dollar junk bonds this year is possible in the absence of another sovereign debt or bank crisis.
“So long as the broader sovereign market remains reasonable, issuance will return,” said Toronto-based Follis of Bank of Nova Scotia. “Sovereign-credit scares tend to temporarily freeze high-yield issuance.”