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CIBC’s Braive Favors Telus, Wireless Carriers: Canada Credit

CIBC Global Asset Management Inc.’s John Braive, who oversees C$42 billion ($41 billion) in fixed-income assets, favors Canada’s wireless operators including Telus Corp. for their growth potential.

Spurred on by the arrival of four new carriers in the past year, Vancouver-based Telus, BCE Inc. and Rogers Communications Inc. have refinanced debt, cut jobs and reinvested the savings in their fastest-growing businesses.

Braive holds debt of all three carriers and said Telus is his favorite pick, helped by its “western presence” in Canada, where economic growth has outpaced that of eastern Canada. The CIBC Canadian bond fund has returned 8.2 percent this year, excluding fees, compared with 6.9 percent for the median of similar funds and 7.8 percent for the benchmark Dex Universe Bond Index, according to CIBC data.

“The carriers really did work hard to drive down their cost structure, deal with their legacy issues, their labor issues specifically,” said Toronto-based Braive, who is vice chairman of CIBC Global Asset Management and has been managing fixed-income assets since 1983. “Now they’re expanding into the wireless sector, and that’s becoming a very profitable sector as more people go wireless.”

Telus’s yields premium hasn’t shrunk as much as its peers this year, meaning Canada’s third-largest wireless company’s debt has scope to outperform. The extra yield investors demand to own Telus bonds instead of government debt ended last week at 148 basis points, compared with 147 basis points on Dec. 31, according to Bank of America Merrill Lynch index data.

Industrial Debt

The spread on Merrill’s broader index of industrial debt, which tracks 358 bonds including Telus’s and has a par value of C$99 billion, has narrowed to 147 basis points from 156 at the end of 2009. Relative yields on Merrill’s index of Canadian bonds rated BBB, including Telus, tightened to 182 from 199.

Elsewhere in credit markets, the spread on Canadian corporate debt held at 135 basis points last week, down from 143 at the end of October, according to Bank of America Merrill Lynch data. Yields jumped to 3.86 percent from 3.77 percent on Nov. 12 and are the highest since mid-September.

Spreads on investment-grade U.S. corporate debt narrowed 1 basis point to 175, or 1.75 percentage points, while globally the gap shrank 2 basis points to 165.

Relative yields on Canada’s provincial bonds expanded 1 basis point to 52. Provincial yields jumped to 3.24 percent, the highest since the first week of August, from 3.14 percent.

Quebec Bonds

Last week, Quebec, Canada’s second-most populous province after Ontario, issued C$500 million in a reoffering of its 4.5 percent bonds due in December 2020, bringing the total outstanding to C$4.5 billion. The debt was priced to yield 81 basis points over similar-maturity federal bonds.

Canada’s company debt has lost investors 1.12 percent this month, paring the gain this year to 6.66 percent. While that’s better than the 5.6 percent return on Canada’s federal debt, it trails the 8.05 percent for global corporate bonds.

Canada’s benchmark 10-year bond rose today, driving the yield 5 basis points lower to 3.09 percent. The price of the 3.5 percent security maturing in June 2020 rose 42 cents to C$103.36.

Fortis BC Inc., which provides electricity to customers in south central British Columbia, sold C$100 million of 5 percent bonds last week that are due in November 2050. The debt priced to yield 135 basis points more than Canada’s 5 percent bond due in June 2037.

Beating Estimates

Telus, whose shares have climbed 36 percent this year, reported third-quarter profit that beat analysts’ estimates, helped by a surge in new wireless subscribers and lower reorganization costs.

The company issued C$1 billion of notes in December and the same amount again in July, refinancing C$2 billion of C$3 billion in outstanding debt leftover from its acquisition of Clearnet Inc. in 2000. Lower rates will save the company C$68 million a year, said a Telus spokesman, Shawn Hall.

That makes a compelling case for refinancing the rest before interest rates rise, said Jonathan Allen, an analyst at Royal Bank of Canada’s RBC Capital Markets in Toronto. “Telus is likely to come to the market in the next few months to fund the remaining C$1 billion,” he wrote in a note this month.

Credit Line

Telus won’t say if that’s going to happen. The company does have a C$2 billion bank credit facility it can tap to repay the remaining C$1 billion due in June, 2011, Hall said.

BCE, Canada’s largest phone company, may tap debt markets again after agreeing in September to spend C$1.3 billion on the shares of broadcaster CTV it didn’t already own.

The current bond climate “makes it very attractive for us to go to the market as soon as that acquisition is completed” to tap lower rates, BCE Chief Financial Officer Siim Vanaselja told analysts this month. No one should rule out BCE’s acting in the next quarter, he said.

Quebecor Inc., based in Montreal, is the latest to challenge the “big three” -- Telus, Rogers and BCE. The company launched a mobile-phone service in Quebec through its Videotron unit, which already offers cable television service and supplies unlimited calling plans designed to undercut Bell.

“Quebecor looks like they have a good business plan, and they do look cheap compared to others in the space,” said Braive. “They haven’t done a lot of issuance, and they’re cheaper than other telcos and cable, and there’s an expectation that we’re going to see some financing by Quebecor upcoming.”

Junk Bonds

CIBC owns Quebecor debt as part of its high-yield portfolio, he said.

The Bank of Canada issued a report last week saying local investor demand is rising for junk bonds, or high-yield, high-risk debt, with the volume of mutual funds dedicated to that part of the fixed-income market growing to C$9.5 billion at the end of 2009 from C$4.4 billion a year earlier.

High-yield debt sales may expand if more firms convert back into corporations from income trusts after tax changes effective next year, the report said.

“Money’s flowing out of what used to be going into the income-trust sector, and part of that has been picked up in the high-yield market,” said Braive. “Definitely there is the attractiveness of the higher yields, and the spread is pretty attractive. Even if it’s come off its high, it’s well above the long-term average.”

Merrill’s Canada High Yield Index, comprising 16 issues at a par value of C$4.4 billion, ended last week at a spread of 497 basis points, compared with 697 at the end of 2009.

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