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CIBC Joins Ontario in Record Kangaroo Debt Sales: Canada Credit

Canadian Imperial Bank of Commerce sold Australian dollar-denominated debt for the first time, joining a record wave of foreign companies issuing so-called kangaroo bonds to diversify funding sources.

Canada’s fifth-biggest bank sold A$750 million ($738 million) of three-year covered bonds, according to an e-mailed statement from HSBC Holdings Plc, which helped manage the sale with Australia & New Zealand Banking Group Ltd. and UBS AG. Export Development Canada, the country’s export-financing arm, and the province of Ontario sold a combined A$1.3 billion worth of bonds in Australia in the past three months.

Sales in the kangaroo market are on pace to reach a record high this year as Australian-dollar assets draw investors seeking debt with higher yields than the near-zero benchmarks in the U.S. and Japan. Issuers including Bank of America Corp., JPMorgan Chase & Co. and the Asian Development Bank have sold a combined A$31.3 billion of the bonds this year, exceeding last year’s total of A$19.9 billion.

“If you are a frequent user of capital markets like Ontario or CIBC and are looking for other places to raise money that are cost-effective, Australia is a good place to go now while Europe isn’t,” Paul Eustace, head of syndication at Toronto-Dominion Bank in London, said in a telephone interview. “Australia is a big market and the demand is there.”

Extra Yield

Canadian borrowers are seeking to tap a broader array of investors as interest charges rise in the domestic market. The extra yield investors demand to own Canadian corporate bonds ended yesterday at 145 basis points, up from 117 in March, according to a Bank of America Merrill Lynch index. Canadian companies issued the most U.S. dollar-denominated debt last month since at least 2007.

Elsewhere in credit markets, HSBC Bank Canada increased the amount outstanding of its 1.66 percent floating-rate notes maturing in August 2013 by C$50 million ($48 million) to C$150 million.

Canada auctioned C$3 billion of 10-year notes yesterday, drawing an average yield of 2.836 percent. The government received bids of C$7.1 billion for the 3.25 percent notes maturing in June 2021, according to a statement on the Bank of Canada’s website.

Demand for the 10-year notes was up from the last sale of the securities in July, based on the number of bids received divided by those accepted, with the bid-to-cover ratio rising yesterday to 2.38 from 2.27 at the prior offering.

Corporate Spreads

The extra yield investors demand to own the debt of Canada’s companies widened to 145 basis points from 144 basis points the day before. The spread has been as wide this year as 154 basis points in June and as tight as 114 basis points in March.

Corporate yields fell to 3.6 percent, from as high as 4.3 percent in June. The securities have returned 7.5 percent this year, compared with 11.3 percent in the U.S. and 9.1 percent globally.

In the provincial bond market, relative yields ended yesterday at 58 basis points, from 71 basis points in May, the Merrill Lynch data show. Bonds in the index returned 7.9 percent this year, compared with 3.7 percent last year and on track for their best performance since an 11.1 percent gain in 2000.

CIBC’s 5.75 percent notes were priced to yield 91.25 basis points more than similar-maturity government debt, according to data compiled by Bloomberg. The bonds will be backed by residential mortgage loans insured by Canada’s government-owned national housing agency, according to the statement.

Swiss Franc Issue

By contrast, CIBC sold 500 million Swiss francs ($520 million) of seven-year 1.75 percent covered bonds in June at 15 basis points more than the benchmark swap rate.

The following month, CIBC sold $1 billion of covered bonds in reopenings of earlier offerings of the debt, which are backed by mortgages or government securities. CIBC sold $400 million of 2 percent notes maturing in 2013 that yield 27 basis points more than similar-maturity U.S. Treasuries and $600 million of 2.6 percent debt due in 2015 at a spread of 56 basis points, Bloomberg data show. A basis point is 0.01 percentage point.

The province of Ontario sold A$275 million of 6.25 percent 10-year Kangaroo bonds last month, priced to yield 126.5 basis points over government debt. Export Development Canada added A$350 million to an existing line of 5.25 percent kangaroo bonds due in 2015. The notes were priced to yield 5.5 percent, or 68.5 basis points more than government debt, according to a statement from Commonwealth Bank of Australia, which helped manage the sale.

Canadian Lenders

EDC wants to become a regular issuer in Australia, Vice President and Treasurer Brian Laffin said. The borrower monitored the kangaroo market for a decade and made its debut after deciding new bank liquidity rules being contemplated in Australia would help create sustainable investor demand for the debt, he said.

Australian pension funds and banks such as Westpac Banking Corp. have bought about half of EDC’s kangaroo bonds, with various Asian and other non-Australian banks snapping up the rest, Laffin said today in a telephone interview from Ottawa.

Issuance costs are “in line with what would be available in other major public markets,” Laffin said without being more specific. EDC hasn’t yet determined when it would next sell kangaroo bonds, he said.

Canadian banks have also been among the top arrangers of kangaroo bonds. Toronto-Dominion Bank is the second-biggest underwriter since the start of 2010 with a market share of 18 percent, according to Bloomberg data. Royal Bank of Canada, the country’s largest lender, is No. 1 with 19 percent of the market.

‘Established Domestic Market’

Reserve Bank of Australia Governor Glenn Stevens has led Group of 20 members by raising the benchmark interest rate in six quarter-percentage-point steps to 4.5 percent since October. On Sept. 29, the Australian dollar reached parity with its Canadian counterpart for the first time since May 2004.

Kangaroo bond issuers may benefit from increased demand as the Australian government reduces planned sales of sovereign bonds, cutting the supply of top-rated notes in the nation’s currency, according to Duncan Haig, Sydney-based head of fixed income trading for Australia at UBS.

“There is an established domestic market in Australia that allows issuers such as the Canadian banks to access a different pool of liquidity,” Mark Hardisty, managing director and head of fixed income trading and syndication at CIBC World Markets, said in a telephone interview from Toronto.

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