Canada’s riskiest companies are handing U.S. investors their worst losses since the financial crisis as slumping crude oil prices threaten to tip the country into recession.
Bonds that junk-rated Canadian issuers sold in U.S. dollars have lost 4.2 percent this month, the worst performance since February 2009, according to Bank of America Merrill Lynch data. The slump, coming as crude prices fell below $50 a barrel for the first time since April, pushed the extra yield investors demand to own the companies’ U.S. dollar debt instead of similar-maturity Treasuries to the highest since February.
With almost 30 percent of these firms in the resource business, falling commodity prices are squeezing revenue, making it harder to come up with interest payments and raising the price of refinancing debt to avoid default.
“What the high-yield market is saying is cost of capital just went up, and in some cases, access to capital has disappeared,” said Keith Bachman, who oversees $6 billion as head of U.S. high yield at Aberdeen Asset Management Inc. in Philadelphia. “As a company has financing to do, whether it’s a loan or a bond maturity, they’ll have trouble accessing capital in the high-yield markets, which may invoke a wave of defaults down the road.”
The Bank of Canada cut its benchmark interest rate this month for the second time this year, to 0.5 percent, citing the economic damage from dropping crude prices.
Oil, the country’s largest export, entered a bear market this month as leading OPEC members pump record volumes and on concern that demand from China may wane. The North American benchmark trades at about $48.52 per barrel.
Canada’s economy shrank 0.6 percent in the first quarter, and probably declined at a 0.5 percent annual pace in the three months through June, according to the central bank’s estimates. A report Friday showed Canada’s economy sank further into contraction in May, shrinking for a fifth straight month as the oil shock continues to take its toll.
Gross domestic product fell 0.2 percent during the month, bringing the decline since the start of the year to 0.8 percent. Economists surveyed by Bloomberg News projected no change in May output.
The average premium U.S. investors demand to hold Canadian high-yield debt over Treasuries rose to 7.15 percentage points July 28, a six-month high, according to the Bank of America Merrill Lynch U.S. High Yield Canadian Issuers Index.
“Companies north of the border are focused on natural resources, oil and minerals,” said Aberdeen’s Bachman. “Commodity prices have fallen hard and high-yield bonds in that space have followed along.”
Cheaper oil prices have spurred some companies to restructure their debt, meaning losses for bondholders. The biggest loser among the top Canadian issuers in the U.S. this month was debt of Lightstream Resources Ltd., with a 29 percent decline, Merrill Lynch data show.
Calgary-based Lightstream, a producer of light oil in Alberta and Saskatchewan, negotiated an exchange with the two largest holders of its $800 million of bonds this month to reduce its debt burden. In the deal, the company swapped more than half its debt for new notes offering a higher claim on the company’s assets in the event of bankruptcy.
The bonds left out of the exchange were knocked down the capital structure and saw their prices plunge by about a third. Moody’s Investors Service labeled the transaction a distressed-debt exchange.
“Some investors have been opportunistic in this sell-off to put themselves in a better position,” Mark Pibl, head of high-yield strategy at Canaccord Genuity Inc., said by phone from New York Thursday. “It’s called clawing your way up the capital structure. We’ll see more of this happening as energy names continue to underperform.”