Bond Sales Rise to Most Since '07 as Global Issuance Trails: Canada Credit
Bond sales this year by Canadian companies exceeded the totals for 2009 and 2008 and are approaching record levels as companies take advantage of low interest rates to shore up balance sheets.
Debt sales from companies such as Rogers Communications Inc. and Manulife Financial Corp. stood at C$62 billion ($61 billion) as of yesterday, surpassing the C$57 billion last year, according to Bloomberg data. Bank of Nova Scotia expects issuance to accelerate in the final two months of the year to as much as C$80 billion, the third-highest total on record.
Canada, tied with Germany for the Group of Seven’s highest growth rate, has attracted record foreign flows into its bond market, driving yields to two-decade lows. The surge in debt sales in Canada contrasts with the drop in global issuance; companies worldwide have sold bonds worth $2.6 trillion in 2010, about two-thirds of last year’s level.
“As rates continue going down, there’s no doubt that companies are going to want to tap the market,” Jean-Pierre D’Agnillo, a bond fund manager who helps oversee about C$15 billion at Standard Life Investments, said by phone from Montreal. “Spreads continue to grind in, and company treasurers are benefiting from issuing out there because coupon rates are really, really low.”
Banks, both foreign and domestic, account for about half the total Canadian-dollar denominated debt sales this year as they seek to issue subordinated debt before Basel III requirements come into force and as regulators clarify funding rules, analysts say.
Issuance “has really accelerated in the last couple of months, and mostly in financial issues for sure,” Hank Cunningham, fixed-income strategist in Toronto at retail brokerage Odlum Brown Ltd. and author of a book on the Canadian bond market, said by phone. “Despite the issuance level, there’s a huge appetite for bonds in this country and from outside our country as well.”
Elsewhere in credit markets, Toronto-Dominion Bank, Canada’s second-largest lender, sold C$1 billion of fixed-to- floating medium term notes. The debt, sold at a yield of 130.40 basis points more than benchmarks, will pay 3.367 percent until November 2015, then 1.25 percentage points more than the Canadian Dealer Offered Rate -- or CDOR -- until maturing in November 2020.
“We’ve been surprised by the amount of bank issuance completed so far this year,” Robert Follis, Bank of Nova Scotia’s head of corporate bond research, said via e-mail. “The market has been comfortable buying these high-quality securities, and banks look to extend their terms of funding.”
Follis said issuance by non-bank Canadian companies and foreign firms issuing Canadian-dollar debt -- the so-called Maple market -- is “within expectations.” He predicted corporate issuance would be between C$75 billion and C$80 billion this year.
Issuance was C$87.9 billion in 2006, the most since Bloomberg began tracking the data in 1999, and C$82 billion in 2007, the data show.
Among the 50 companies in Merrill Lynch’s Canadian Corporate Index that issue the most Canadian-dollar debt, the bonds of HSBC Bank Plc, Europe’s biggest bank, National Bank of Canada, the nation’s sixth-largest lender and Toronto-Dominion Bank, it’s second-largest, have performed best this month, with total returns of 1.26 percent, 0.3 percent and 0.3 percent.
Loblaw Cos., the nation’s largest grocery-store chain, IGM Financial Inc., Canada’s largest non-bank-owned mutual fund company, and Fortis Inc., its largest publicly traded power distribution utility, performed worst, losing 0.9 percent, 0.8 percent and 0.8 percent.
The extra yield investors demand to hold the debt of Canada’s corporations instead of its federal government was unchanged yesterday at 142 basis points, or 1.42 percentage points, in from 145 at the end of September, according to Bank of America Merrill Lynch data. So-called spreads were as tight this year as 114 basis points in March, then widened out to as much as 154 in June on concern over European sovereign debt.
Spreads on U.S. corporate bonds tightened 8 basis points this month to 176 as of Oct. 27 and global corporate bonds narrowed 9 basis points to 164.
Canadian corporate yields ended yesterday at 3.66 percent, from 3.67 the day before and 3.66 at the end of September, according to the Merrill index, which holds more than 700 bonds with a par value of C$278 billion. The index has returned 0.01 percent this month, headed for its sixth months of gains.
U.S. Corporate Bonds
U.S. corporate bonds have lost 0.2 percent in October, while global corporate securities have fallen 0.2 percent.
In provincial bond markets, relative yields were unchanged yesterday at 52 basis points, from 53 basis points at the end of last week and 58 on Sept. 30. Yields were 3 percent, little changed from the end of last month. The index has returned 0.2 percent this month.
Canada’s federal bonds have lost 0.3 percent this month, trimming the gain in 2010 to 7 percent. That compares to a loss of 0.5 percent in October for U.S. government bonds and a gain of 8 percent this year.
The benchmark Canadian 10-year bond’s yield touched 2.91 percent yesterday, the highest level in five weeks, before slipping to 2.85 percent today as the 3.5 percent security due in June 2020 rose 20 cents to C$105.43.
The benchmark two-year note’s yield fell to 1.42 percent, from 1.46 percent two days ago, which was the highest level in a month. The 1.5 percent bond maturing in December 2012 increased 2 cents to C$100.17. The 30-year’s yield dropped 1 basis point to 3.47 percent.
Canada’s Finance Minister Jim Flaherty said the country was “on track” to balance its budget in the medium-term. Flaherty, who spoke to reporters yesterday in Ottawa, said this month Canada will become the first country in the Group of Seven to balance its budget by 2015.
Corporate yields have plunged to the lowest in at least two decades, reaching 3.54 percent on Oct. 19 according to Merrill Lynch data, as Canada’s relatively sound fiscal position lures international purchasers and bond investors seek extra yield with government benchmark interest rates at historic lows. Companies are keen to exploit the low-rate environment to refinance higher-cost debt and improve earnings.
Lower Funding Costs
“Funding rates were low in 2009 but are lower in 2010 and, arguably, there is a bit more comfort from a macro-economic and operating perspective,” Altaf Nanji, senior credit analyst in Toronto at Royal Bank of Canada’s RBC Capital Markets, wrote in an e-mail. RBC Capital ranks first for managing corporate bond sales in Canada this year, followed by CIBC and Scotia Capital.
The weighted average cost of debt capital for the 234 companies on the Standard & Poor’s/TSX Composite Index is 12 percent, while the weighted average cost of equity capital is 14 percent, Bloomberg data show.
“Low all-in yields on a historical basis have enticed many issuers to come to market,” Jason Parker, head of fixed-income research in Toronto at Bank of Montreal’s BMO Capital Markets, said via e-mail. “We have even seen a number of issuers prefunding upcoming maturities one and two years out, in order to take advantage of current attractive funding costs.”
Foreign investors acquired a net C$10.8 billion in Canadian bonds in August, Statistics Canada said this month, the 20th straight positive inflow, which is the longest string of net purchases since the data begins in 1988.
Canada’s gross domestic product grew as expected in August after shrinking the month before, led by wholesaling and manufacturing. Output rose 0.3 percent to a seasonally adjusted annual rate of C$1.24 trillion ($1.21 trillion) in August after a 0.1 percent contraction in July, Statistics Canada said today in Ottawa. The result matched the median forecast of 24 economists surveyed by Bloomberg News.
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