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Toronto Preps Bond Sales as Yields Top New York: Canada Credit

Toronto Preps Bond Sales as Yields Top New York
The Toronto skyline. Photographer: Norm Betts/Bloomberg

Toronto, Canada’s biggest city, may sell C$700 million ($683 million) in debt in 2011, almost double last year’s total, tapping demand for municipal bonds as candidates vow fiscal prudence ahead of the mayoral election.

The city plans to issue as much as C$500 million in 30-year securities to finance streetcars, subways and roads, plus another $200 million in 10-year debt to maintain existing infrastructure, said Martin Willschick, the city’s manager of capital markets. He said any decisions will have to wait until the city council meets after the Oct. 25 municipal election.

Canada’s business capital and North America’s third-largest financial-services center weathered the recession better than many U.S. cities and Ontario, where the manufacturing sector was hurt by a slump in U.S. consumer spending. Canada’s five largest banks, which are based in the city, took fewer writedowns than their U.S. counterparts and laid off fewer employees.

That makes Toronto’s bonds appealing to investors because they offer a higher yield than Ontario bonds, even though the city’s economy is healthier than the province, he said. Toronto also offers higher yields than New York-area credits even though it’s considered less risky by rating companies.

“We don’t rely on manufacturing, the economy has come back, housing prices have been very healthy,” Willschick said in an interview. Investors “see us as double-A rated credit and fairly safe and yet you can pick up extra yield or basis points over Ontario at basically the same risk level.”

The spread, or extra yield investors demand to own 30-year debt issued by the city over Ontario bonds of a similar maturity, has widened since July by 7 basis points, or 0.07 percentage point, to 40 basis points. The city has an AA rating from Standard & Poor’s, its second-highest rating, while Ontario is rated AA-.

Provincial Bonds

Elsewhere in credit markets, the extra yield investors demand to own the debt of Canada’s companies rather than federal government securities narrowed yesterday by 1 basis point to 142 basis points, from 143 the day before, according to a Bank of America Merrill Lynch index. The so-called spread was as wide as 154 basis points in June, and reached 401 basis points in January 2009.

Corporate yields rose to 3.57 percent yesterday, from 3.54 percent on Oct. 19, the lowest level since Merrill Lynch started tracking the data in June 1992. Yields were 3.63 percent at the end of last week, compared with 3.68 percent for U.S. corporate yields and 3.43 percent for an index of global corporate debt.

Bank of Nova Scotia

Bank of Nova Scotia paid 57.25 basis points over Treasuries to sell $2.5 billion of 1.65 percent covered bonds denominated in U.S. dollars. The debt matures in October 2015.

Today’s Bank of Nova Scotia sale raises annual U.S. dollar- denominated issuance of the debt to the most on record, according to data compiled by Bloomberg. Borrowers have sold $28.9 billion of U.S. dollar covered bonds this year, surpassing the $26.6 billion sold in 2007, Bloomberg data show.

In the provincial debt market, spreads were 1 basis point narrower at 54 basis points, from 55 yesterday. The yield dropped to 2.92 percent.

Ontario, Canada’s most-populous province, offered 71 basis points over benchmarks in a C$1 billion reoffering of its 4.2 percent bonds maturing in June 2020, bringing the total outstanding to C$8.35 billion.

Canadian government 10-year bonds yielded 2.75 percent, or 21 basis points higher than 10-year U.S. Treasuries, which yielded 2.54 percent yesterday. The gap ended last week at 23 basis points.

CPI Report

The annual inflation rate in Canada quickened in September to the fastest pace since January on energy and shelter costs, data showed today. energy and shelter costs.

The consumer price index rose 1.9 percent, after a 1.7 percent gain in August, Statistics Canada said. The core rate that excludes eight volatile items such as gasoline slowed to 1.5 percent from 1.6 percent, the slowest pace since December. Economists in a Bloomberg News survey forecast the inflation rate would be 1.9 percent and the core rate 1.6 percent.

Canada’s provincial debt has returned 0.6 percent this month, compared with 0.2 percent for federal debt.

Toronto offers higher yields than New York-area credits, even though rating companies consider it less risky than the U.S. financial capital. Toronto’s 5.2 percent bonds due in June 2040 yield 4.66 percent, compared with 4.20 percent for the Port Authority of New York and New Jersey, which is financing the reconstruction of Manhattan’s World Trade Center. Its 5 percent bonds maturing in July 2039 are rated Aa2 by Moody’s, one rank below Toronto’s Aa1 rating.

Financial-Services Strength

While Toronto lost jobs during the slowdown, “the recession didn’t really impact the city in our opinion in terms of output, and that’s largely because of the strength of the financial-services sector,” said S&P analyst Stephen Ogilvie.

Toronto’s debt burden should climb from C$2.7 billion, or 35 percent of operating revenue in 2008, to about C$4.2 billion, or 44 percent, in 2013, as it overhauls the city’s transport network, S&P estimates. “That will make their debt burden more consistent with domestic and international peers at the double-A category” such as Ottawa, Madrid and Auckland, he said.

City Councilor Rob Ford and former provincial politician George Smitherman are vying for the lead to become the next mayor. Ford has said he’d cut operating costs by 6 percent or C$1.7 billion over four years by assuring competitive bidding on contracts, outsourcing garbage collection and cutting the city’s workforce by replacing half of retiring workers.

Balanced Budget

Smitherman has said his plan will save the city C$265 million next year to ensure a balanced budget, in part by replacing fewer retired workers. Smitherman also said he can generate C$298 million in new revenue from initiatives such as selling underused city land.

Willschick, Toronto’s manager of capital markets, said he expects the city’s 30-year debt to yield 40 basis points above Ontario debt and its 10-year bond yields to be 30 basis points higher.

The mayoral campaign has had little impact on Toronto’s bond prices or yields, Willschick said.

“At this point it doesn’t look as if the markets have made any judgments regarding to the mayoralty race,” he said.

The price of the bond is little changed since the beginning of October.

The city in April sold C$600 million worth of 30-year debentures and borrowed an additional C$100 million through the Canada Mortgage and Housing Corp. as part of a fiscal stimulus program led by the federal government. Overall borrowing of $700 million in 2010 was an increase from about C$400 million in 2009.

Toronto’s net debt represents about 40 percent of the city’s operating revenue, compared with almost 100 percent for Montreal, Canada’s second-biggest city, according to Moody’s.

“Toronto has a relatively low debt burden and high levels of liquidity,” said Jennifer A. Wong, an analyst at Moody’s Investors Service in Toronto. “Their capital plans and projected debt issuance is manageable.”

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