Royal Bank of Canada is on pace to join the ranks of the 10 largest underwriters of high-yield debt in the U.S. for the first time as the largest Canadian lender seeks profits abroad with issuance slowing at home.
Royal Bank’s RBC Capital Markets ranks 10th among arrangers of speculative-grade bonds at the end of the third quarter after luring bankers from firms including Deutsche Bank AG (DBK) and Credit Suisse Group AG. (CSGN) The Toronto-based firm has never been a top-10 underwriter for non-investment-grade debt in the U.S. on any given year, according to data compiled by Bloomberg.
“I compare Royal to a race car driver who never finishes in the winner’s circle, but finishes every race and never crashes,” Peter Routledge, an analyst at National Bank Financial, said yesterday in a telephone interview from Toronto. “You can’t say he doesn’t take risk if he’s running around the track at 200 miles an hour, but he doesn’t crash and earns a decent paycheck. That’s Royal.”
RBC is focusing on the U.S. junk-bond market, which is more than 300 times larger than its domestic counterpart, as booming sales contrast with a slowdown in Canada. Record stimulus from the Federal Reserve is filtering into the balance sheets of the most indebted U.S. borrowers, while in Canada commodity-dependent issuers are suffering from a plunge in resource prices as Asia curbs consumption.
While RBC expects total sales of junk bonds in the U.S. market to surpass last year’s record $353 billion, on Sept. 4 it cut its annual forecast for Canadian issuance to as little as C$4 billion ($3.9 billion) from about C$6 billion. The firm boosted the headcount in its U.S. credit team by 15 percent in the past two years, hiring almost 20 people, including 10 sales staff and eight traders. Last month Neil Yaris, who has held jobs at Credit Suisse and Bank of America Corp., joined as co-head of high-yield debt trading.
“We’ve had a focus over the last two years of upgrading our talent, increasing our balance sheet selectively and increasing our resources in the overall credit business, especially in the U.S.,” Mike Meyer, global head of credit at RBC Capital Markets, said in a Sept. 30 phone interview from New York. “A lot of our ranking has to do with people; we’ve made a number of strategic hires on our high-yield desk.”
Royal Bank’s long-standing goal to be a Top 10 investment bank in the U.S. contrasts with retrenchment in other areas of banking. The company sold its unprofitable U.S. lender RBC Bank to PNC Financial Services Group Inc. in March 2012, ending an unsuccessful decade-long foray into U.S. retail banking.
In Canada, RBC slipped to the third spot among underwriters of high-yield debt, from No. 1 in 2012. Still, the firm has led arrangers of investment-grade company bonds in Canada for at least 14 years.
Elsewhere in credit markets, the Bank of Canada auctioned C$2.8 billion of notes today due in June 2024 at an average yield of 2.64 percent, compared with 2.729 percent at the auction of the securities on Aug. 14. Today’s offering attracted C$6.8 billion in bids for a bid-to-cover ratio, a gauge of demand, of 2.43, versus 2.49 at the August sale.
The extra yield investors demand to own the debt of investment-grade corporations rather than the federal government was unchanged yesterday from a day earlier at 127 basis points, or 1.27 percentage points, the Bank of America Merrill Lynch Canada Corporate Index showed. Yields held at 3.25 percent.
The premium investors demand for provincial debt compared to federal benchmarks remained at 73 basis points, according to the Bank of America Merrill Lynch Canadian Provincial & Municipal Index. Yields rose to 3.06 percent, from 3.05 percent on Sept. 30.
Corporate debt has lost 0.1 percent this year, compared with provincial debt’s 2.7 percent drop and a 2.1 percent loss by federal-government debt.
Government bonds rose today, with the yield on benchmark 10-year notes dropping one basis point to 2.55 percent. The price of the 1.5 percent security due June 2023 gained 8 cents to C$91.07 at 12:47 p.m. in Toronto.
A Bank of America Merrill Lynch index of U.S. junk bonds has returned 3.8 percent in 2013, compared with a 2.5 percent loss on investment-grade bonds. In Canada, high-yield bonds gained 3.3 percent this year to Sept. 30.
RBC arranged high-yield debt sales for companies including Sprint Corp., Sirius XM Radio Inc. (SIRI) and Ancestry.com Inc. in the third quarter, according to data compiled by Bloomberg.
Sanchez Energy Corp. (SN), an oil explorer and producer based in Houston, hired RBC with Credit Suisse to manage its first junk bond in June, which it increased last month to a total $600 million.
“There’s some that do more deals than others or are higher on the league tables, but it’s really the relationship focus and the delivery of the entire bank -- and the manner in which it’s done -- that drives us to really favor RBC,” Michael Long, Sanchez Energy’s chief financial officer, said in a telephone interview.
In April RBC hired former Credit Suisse banker Steve Oplinger as head of U.S. high-yield and leveraged loan sales and trading. The company added John Rote, former head of Bank of America’s high-yield syndicate in New York, in May and Deutsche Bank researcher Guy Baron in June.
Royal Bank’s return on equity for capital markets is at 14.3 percent for the first nine months of fiscal 2013, according to financial statements. That compares with 13.5 percent in 2012 and 15.2 percent in 2011.
“They used the crisis and now the aftermath to selectively poach talent from competitors, and they’ve done that incrementally,” National Bank’s Routledge said. “If you look at the return-on-equity in capital markets, it’s held up well.”
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