Corporate Issuance May Slow as Profits Increase: Canada Credit

Canadian corporate bond issuance may slow during the second half of the year as funding demand eases amid rising profits and after firms rushed to sell debt earlier this year to benefit from low yields.

Corporate issuance during the first six months of this year totaled C$38.7 billion ($36.4 billion), the highest level since C$44.9 billion in the first half of 2008, and 37 percent above the C$28.2 billion year-ago levels, according to Bloomberg data. Issuance has increased for three consecutive quarters.

Companies hurried to issue debt ahead of the Bank of Canada’s June 1 decision to raise its benchmark lending rate from record lows, and to take advantage of a “re-opening” of credit markets, said Robert Follis at Bank of Nova Scotia.

“For the second half, we expect issuance to be down year-over-year and sequentially from the first half,” Follis, head of corporate bond research at the bank’s Scotia Capital unit in Toronto, said in a telephone interview. “Many companies have done their financing in the first part of the year, he said, adding that “companies continue to generate more and more internal cash flow so they are able to fund a little bit more of their growth or even refinancing needs.”

Corporate profits before taxes increased for a third consecutive quarter during the first three months of this year, growing at an annual pace of 8.6 percent, Statistics Canada reported May 31. Wages and salaries grew at a 1.2 percent pace during the same period.

Canadian corporations were holding in the first quarter C$685 billion of retained earnings, which is accumulated net income retained for reinvestment, up 9.9 percent from a year earlier, according to Statistics Canada.

Corporate Spreads

Elsewhere in credit markets, the extra yield investors demand to own corporate instead of federal debt remained at 149 basis points, according to Bank of America Merrill Lynch data.

The spread rose to the highest in more than eight months in June, reaching as wide as 154 basis points amid concern the European debt crisis could widen and reduce investor appetite for corporate debt. The spread was as low as 114 basis points on March 19.

Total debt issuance, including sovereigns, in Canada totaled C$62.8 billion in the first half of this year, led by Royal Bank of Canada’s RBC Capital Markets’ 16.9 percent share of the underwriting market, according to Bloomberg data. That’s up from C$55.9 billion in the first half of last year and C$52.2 billion in the final six months of 2009.

RBC Capital Markets led the bank rankings for corporate bond issues in the first half, with a 31 percent market share, followed by Scotia Capital at 16.5 percent, Bloomberg data show.

First to Raise

Bank of Canada Governor Mark Carney on June 1 became the first Group of Seven central banker to raise interest rates, increasing the target level to 0.5 percent from a record low 0.25 percent. The statement accompanying the decision said that future decisions about increases would weigh domestic growth against an uneven global recovery.

Standard & Poor’s raised the ratings on 20 Canadian companies during the second quarter, including Teck Resources Ltd., Domtar Corp. and Royal Bank of Canada, versus seven downgrades to firms such as Toyota Credit Canada Inc. and Sun Life Financial Inc., according to Bloomberg data. The ratio of 2.86 corporate upgrades for each downgrade during the quarter is the highest quarterly reading since the data began in 2000.

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