U.S. Dollar Bonds Draw Potash Amid Record Sales: Canada Credit
Canadian borrowers from Potash Corp. of Saskatchewan Inc. to Talisman Energy Inc. are selling U.S. dollar debt at a record pace as the difference in yields between the two nations evaporates.
Investors have bought $40 billion of investment-grade debt issued by Canadian companies this year, almost double from the corresponding period in 2009, according to data compiled by Bloomberg. The bonds account for 5 percent of sales in the U.S., up from 2 percent last year, the data show.
While companies in Canada are drawing on U.S. investor demand for debt in an economy that benefits from rising prices for natural resources, borrowers enjoy bond yields that have converged for the first time in six years. U.S. yields have averaged about 61 basis points more than Canadian rates since 2000, according to Bank of America Merrill Lynch indexes.
“The U.S. dollar market has been and continues to be the world’s deepest capital market, including debt capital markets,” Bruce Rothney, president and country head for Barclays Capital Canada in Toronto, said in an interview. “People want to have exposure to the corporate and government credits in Canada.”
Canadian borrowers are also gaining the advantage of issuing in U.S. dollars after the Canadian currency surged to parity this year against the greenback.
Potash Corp., the world’s largest fertilizer company, sold $1 billion of U.S. dollar denominated debt Nov. 22 to help pay for a planned stock buyback, Bloomberg data show. The bond offering was Saskatoon, Saskatchewan-based Potash Corp.’s first in 14 months.
The $500 million, seven-year portion was sold with a coupon of 3.25 percent, or 122 basis points more than Treasuries. The $500 million of 30-year bonds were issued at a coupon of 5.625 percent, a spread of 152 basis points, or 1.52 percentage points.
Elsewhere in credit markets, the extra yield investors demand to hold the debt of Canada’s corporations rather than its federal government narrowed yesterday to 142 basis points, from 143 basis points at the end of October, according to Bank of America Merrill Lynch data. Spreads reached 134 basis points Nov. 15, the narrowest since May 10.
The securities lost 0.85 percent in November as a drop in bond prices drove yields to 3.91 percent on average, from 3.64 percent on Oct. 31. The loss trimmed this year’s gain to 6.95 percent, including reinvested interest.
In the provincial bond market, relative yields were unchanged for the month at 53 basis points. Yields rose to 3.18 percent, from 2.96 percent the month before. The securities lost 1.21 percent in November, the biggest loss since December 2009 and cutting the gain in 2010 to 7.09 percent.
Government bonds had their worst month of the year, as the yield on 10-year securities rose 25 basis points to 3.06 percent. Canada’s sovereign debt lost 1.04 percent in November, compared with a drop of about 0.85 percent for Treasuries through Nov. 29.
Canada is scheduled today to sell C$700 million ($683 million) of 1.5 percent inflation-linked bonds due in 2044. The previous auction of real-return bonds, on Aug. 25, drew a median yield of 1.29 percent and a bid-to-coverage ratio of 2.25 times.
Canada’s economy slowed more than forecast in the third quarter as a strong currency restrained exports and boosted imports. Gross domestic product expanded at a 1 percent annual pace in the third quarter, Statistics Canada said yesterday in Ottawa, following an increase of 2.3 percent in the prior three months. Economists predicted a 1.5 percent gain, according to the median of 26 estimates gathered by Bloomberg News.
The Canadian dollar has strengthened 27 percent against the U.S. dollar since March 2009, curbing exports by companies such as forest-products firm Tembec Inc. and encouraging companies to import equipment to boost productivity. Bank of Canada Governor Mark Carney left interest rates unchanged in October after three previous increases, citing the “more gradual” recovery.
“The Canadian economy can’t put distance between itself and the U.S., and that’s because of trade,” said Doug Porter, deputy chief economist at BMO Capital Markets in Toronto. “There is no urgency for the Bank of Canada to start tightening again.”
For the first time since 2004 there is no difference between U.S. and Canadian corporate bond yields, Bank of America Merrill Lynch show. U.S. yields were about 2.5 percentage points more than Canadian yields as recently as March 2009, the data show.
“There’s an appetite for resource exposure on the part of U.S. investors, and the perception of Canadian debt abroad has done well and didn’t suffer as much due to erosion in the financial sector,” said Mark Chandler, head of Canadian fixed income and currency strategy at Royal Bank of Canada in Toronto.
While Canadian companies are selling the most dollar- denominated bonds ever, issuance slowed this month amid concern that Ireland’s debt crisis will spread across Europe, slowing the global economy and causing investors to pare back on riskier assets. Sales fell to $2.88 billion this month from $5.02 billion in October, Bloomberg data show.
Talisman, based in Calgary, bucked the trend. The company sold $600 million of 3.75 percent notes due in February 2021 after increasing the size of the offering from $500 million, Bloomberg data show.
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