RBC Tops National Bank to Lead Provincial Sales: Canada Credit

RBC Capital Markets, the top arranger of Canadian government-bond issues for seven years, saw its market share fall to its lowest level since 2007 as National Bank Financial gained on higher sales outside Quebec.

Canadian provinces, cities, municipalities and government agencies raised C$95.8 billion ($95.9 billion) in debt last year, 4.2 percent less than the record C$100 billion in 2009, according to data compiled by Bloomberg.

“Governments have had to finance larger deficits and that’s what has created all the activity,” said Ricardo Pascoe, executive vice president of financial markets at National Bank Financial in Montreal.

Royal Bank of Canada’s investment-banking unit ranked No. 1 with 85 sales of provincial and other government-related bonds valued at C$20.4 billion, according to Bloomberg data. National Bank of Canada’s investment bank advanced two spots to second with C$18.7 billion from 64 sales, its best showing since 2006. RBC’s market share slipped 1.3 percentage points to 21.3 percent last year, its lowest since 2007, while National’s share rose 5.8 percentage points to 19.6 percent.

“Some of the larger issuers were quite active,” such as Ontario and Quebec, said Grant Berry, RBC’s managing director of debt capital markets for government finance in Toronto. “We also had a number of other issuers, who had not really been that active over the last couple years, see their programs ramp up.”

Bond sales may fall to between C$85 billion and C$90 billion in 2011 as provinces narrow their deficits, Berry said.

Provincial and municipal bonds returned 7.2 percent last year, the most since 2005, according to Bank of America Merrill Lynch data.

Corporate Yields

Elsewhere in credit markets, the extra yield investors demand to own the debt of Canadian investment-grade corporations rather than the federal government narrowed yesterday to 136 basis points, or 1.36 percentage points, from 137 on Jan. 3, according to a Bank of America Merrill Lynch index. Yields rose to 3.96 percent, from 3.91 percent.

The yield on Canada’s 10-year bonds rose seven basis points to 3.25 percent today, as the price of the 3.5 percent security due in June 2020 fell 58 cents to C$102.04.

Canadian factory raw-materials costs rose at the fastest pace in 10 months in November, led by petroleum and metals, and exceeded gains in finished product prices for a second month. The raw-materials price index rose 3.5 percent, following a revised gain of 2.1 percent in October, Statistics Canada said today from Ottawa.

Employment Forecast

Employers in Canada added 20,000 jobs in December, after creating 15,200 positions in November and 3,000 in October, according to the median forecast of 20 economists in a Bloomberg News survey. Statistics Canada reports the data on Jan. 7.

The Bank of Canada will release further details of its Jan. 12 auction of five-year bonds tomorrow. The previous sale of five-year securities, a C$3.5 billion offering on Nov. 3, drew an average yield of 2.18 percent and a bid-to-cover ratio of 2.43 times, according to data on the central bank’s website.

In the provincial bond market, relative yields were unchanged at 53 basis points yesterday from Jan. 3. Yields rose to 3.32 percent, from 3.28 percent.

Toronto-Dominion Bank’s TD Securities unit ranked third in government bond sales, with C$18.3 billion, followed by Canadian Imperial Bank of Commerce’s CIBC World Markets unit with C$15.5 billion and Bank of Montreal’s BMO Capital Markets unit with C$9.74 billion.

Near-Record Levels

Canada’s provinces, cities and government agencies issued debt at near-record levels to help cover budget deficits. Canada Housing Trust sold C$39.4 billion in debt last year, followed by C$21.3 billion from the province of Ontario and C$10.3 billion from the province of Quebec.

“Provinces give us some decent spread with some pretty good liquidity, which at times we need in our portfolios,” said Doug Gardiner, senior managing director and head of Canadian public fixed income at Sun Life Financial Inc., the country’s third-biggest insurer. “Longer term, we see good value because the provinces are committed to bringing down their budgetary deficits.”

Sun Life will buy corporate bonds and provincial debt this year, though the insurer is a bigger purchaser of corporates because of the extra spread, said Gardiner, who helps manage C$23 billion in assets.

“We do see good long-term value in provincial bonds,” Gardiner said. “With spreads being out and with the provinces beginning to wrestle with their budget situation we see progress there. And long term we do see spreads performing better.”

Budget Deficit

The Ontario government forecast in its Nov. 18 budget update a deficit of C$17.3 billion for fiscal 2011-12, down from an C$18.7 billion budget gap for the current year that ends on March 31 for Canada’s most populous province.

Quebec Finance Minister Raymond Bachand said Dec. 2 that the province’s 2011-12 deficit will be C$3.2 billion, down from a projected C$4.6 billion for this year.

The composition of issuance may change this year, with more bonds sold in Canada, RBC’s Berry said.

“If we get international markets getting very choppy, that makes it more likely that more bonds get done domestically, especially when there’s really bad news,” Berry said. “People tend to stay at home.”

National climbed the rankings by extending beyond its home province of Quebec with deals in British Columbia, Ontario and Alberta, as well as sales for the Canada Housing Trust. The value of deals outside Quebec arranged by the Montreal-based firm rose to 26 percent last year from 11 percent in 2009, according to Bloomberg data.

Overnight Successes

“It’s one of those overnight successes that has taken us years and years to get to,” Pascoe said. “We have had a consistent focus in this business for the past five years.”

National’s goal has been to become Canada’s leader in government finance, Pascoe said. That involved developing trading capabilities for provincial, municipal and government of Canada debt, and building on its role as top seller for Quebec.

“This is one business where our size is not a hindrance, and we can compete with the largest competitors in Canada head- to-head,” Pascoe said.

National expects government bond sales to be little changed in 2011 from last year.

RBC has ranked No. 1 for government debt sales every year since 2004, according to Bloomberg data. Royal Bank is Canada’s largest bank, while National ranks sixth by assets.

“There’s no secret and no silver bullet, it’s just getting out there and doing it,” Berry said. “These league tables are the outcome of a lot of hard work by a lot of different people across all the firms.”

To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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RBC Tops National Bank to Lead Provincial Sales

Norm Betts/Bloomberg

RBC has ranked No. 1 for government debt sales every year since 2004, according to Bloomberg data.

RBC has ranked No. 1 for government debt sales every year since 2004, according to Bloomberg data. Photographer: Norm Betts/Bloomberg