Recovery Boosts Corporate Paper From 13-Year Low: Canada Credit

Outstanding Canadian commercial paper grew in April for the first time in a year, rebounding from an almost 13-year low, as the economic recovery and increased confidence in the ability to roll over debt led to more short-term borrowing.

Total commercial paper outstanding rose 1.3 percent to C$57.7 billion ($54.2 billion), according to the latest available data from the Bank of Canada. Commercial paper has fallen 66 percent since peaking at C$172 billion in July 2007, when Canada’s asset-backed commercial paper market froze amid concerns the debt may have been tied to U.S. subprime mortgages.

“Companies feel more comfortable issuing short-term paper and at the same time their level of business activity has increased, so there’s a greater need for funding,” said Robert Follis, head of corporate bond research at the Bank of Nova Scotia in Toronto.

The Ottawa-based central bank’s report also showed that total short-term business credit, which includes bank loans and bankers’ acceptances, rose for the first time in 17 months to C$322.9 billion in May. The bank predicted in April business investment will contribute 0.2 percentage point to Canada’s 3.7 percent growth this year, after contributing more than 80 percent of last year’s 2.2 percent contraction.

Part of the drop in commercial paper issuance may have been due to companies choosing to “term out” their borrowing by selling bonds instead of short-term paper, according to Follis.

More Expensive

While more expensive for the issuing company, selling longer-duration debt reduces the risk of not being able to roll over the borrowing when it comes due. Outstanding corporate bonds and debentures have risen 21 percent since July 2007 to C$317.1 billion in May, according to the Bank of Canada.

Elsewhere in credit markets, the extra yield investors demand to own Canadian company debt rather than federal government held steady at 149 basis points yesterday, according to a Bank of America Merrill Lynch index. The yield gap, or spread, had been as narrow as 114 basis points on March 19. Overall yields fell to 3.95 percent from 3.98 percent.

Traders are scaling back bets on how quickly the Bank of Canada will raise interest rates. Yields on six-month overnight index swaps, which measure what investors expect the bank’s policy rate will average over that period, declined to 0.764 percent yesterday from 0.775 percent on July 2. The rate had been as high as 0.855 percent on June 22.

Canada Post Issuing

Canada Post Corp., the state-owned mail service, said it would issue up to C$1 billion in long-term debt in two series of bonds with durations up to 30 years. Bank of Montreal said it was lowering some of its posted mortgage rates by 0.1 percentage point.

DBRS Ltd. data shows corporate commercial paper outstanding rose 9.4 percent to C$27.5 billion between December and April, before dropping 0.2 percent in May. Paper issued by car and parts manufacturers such as General Motors Acceptance Corp. of Canada rose for four straight months to C$3.2 billion in May and short-term debt from non-bank financial institutions such as Manufacturers Life Insurance Co. gained for five straight months to C$10.4 billion in May.

Companies may have locked in borrowing while the central bank’s interest rate was a record-low 0.25 percent, Follis said. In June, Governor Mark Carney became the first Group of Seven central banker to raise interest rates, increasing the bank’s target to 0.5 percent.

Biggest Restructuring

“We’re coming off a low base, but there’s definitely growth that’s occurred,” said Kent Wideman, DBRS chief credit officer.

About C$32 billion of Canada’s asset-backed commercial paper became insolvent in August 2007, leading to a court- ordered plan in which the short-term debt was swapped for longer-term notes in Canada’s biggest restructuring.

In the U.S., total outstanding commercial paper has fallen 51 percent to $1.1 trillion in June since peaking at $2.22 trillion in July 2007, according to U.S. Federal Reserve data. That matched 1998 levels.

The level of Canadian commercial paper is “still very low, as many companies had termed out a lot of their short-term paper when liquidity concerns were at their peak,” Follis said. “That concern has declined materially.”