Junk Bond Sales Soar as Returns Top U.S. Market: Canada Credit
Companies sold a record amount of high-yield bonds in Canada this year, taking advantage of investor demand for alternatives to low-yielding government bonds amid the economic recovery.
Air Canada and Armtec Holdings Ltd. (ARF) are among eight companies that sold C$2.23 billion ($2.22 billion) of non-investment grade bonds in Canadian dollars this year, topping the previous annual high of C$1.8 billion in 2007, according to data compiled by Bloomberg. High-yield issuance almost tripled from C$800 million last year.
“It’s a sign of an increased role of the capital markets for these companies to raise money rather than go to the banks or to the U.S. market,” Frederick Marki, a portfolio manager who oversees C$1.5 billion in Canadian fixed-income assets at Western Asset Management Co., said in an interview. “I suspect it’s a fundamental change and it will last.”
Canadian high-yield corporate debt, reflecting a global search for yield, has returned almost 20 percent this year, after a 32 percent rise in 2009, according to Bank of America Merrill Lynch data. That compares with a 14 percent total return for comparable debt in the U.S.
“We see quite a demand as a reach for yield with low yields everywhere,” Marki, who is based in Pasadena, California, said yesterday at the Bloomberg office in Toronto. “Given the turn in the business cycle, which we consider very real and very sustainable, we expect high yield to be very attractive with high returns.”
High-yield, high-risk bonds are rated below Baa3 by Moody’s Investors Service and less than BBB- by Standard & Poor’s.
The extra yield investors demand to hold Canadian non-investment grade bonds instead of comparable government of Canada debt was 545 basis points on Oct. 13, down from 697 basis points at the end of 2009. Investors in U.S. high-yield debt have helped push the average yield to 7.7 percent from 9.2 percent in July, according to a Bank of America Merrill Lynch index.
Canada’s dollar advanced to more than its U.S. counterpart yesterday for the first time since April on speculation the economy will continue to benefit from rising prices for oil, fertilizer, uranium and other commodities.
Moody’s and S&P have upgraded the credit ratings of more sellers of Canadian high-yield debt this year than they have downgraded, according to Bloomberg data. Moody’s raised the ratings of 22 companies and cut six; S&P has lifted ratings on 25 and downgraded 12.
Elsewhere in credit markets, Hydro-Quebec, Canada’s biggest electric utility, sold an additional C$500 million of 5 percent bonds maturing in 2050, raising the amount outstanding to C$3.5 billion. The bonds were sold to yield 84 basis points more than comparable Canadian government debt.
Atlantic Power Corp. (ATP), a Boston-based electricity producer, sold C$70 million of 5.6 percent bonds due in June 2017.
The extra yield investors demand to own the debt of Canada’s companies tightened to 142 basis points yesterday from 145 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 lowest since at least 1992. The securities have returned 7.8 percent this year, compared with 12 percent in the U.S. and 9.6 percent globally.
In the provincial bond market, relative yields ended yesterday at 55 basis points, compared with 71 basis points in May, the Merrill Lynch data show. Bonds in the index returned 8 percent this year, compared with 3.7 percent last year and on pace for their best performance in a decade.
Canadian government bonds have returned 7.3 percent this year, after reinvested interest, according to another Merrill Lynch index. U.S. Treasuries are up 9 percent, compared with a 6.4 percent gain for government bonds globally.
Bonds due in 10 years issued by Canada yield about 25 basis points more than Treasuries. As recently as April, Treasuries yielded as much as 39 basis points more than Canada bonds.
Increased demand for high-yield debt means fewer Canadian companies may sell bonds in U.S. dollars, a sign of the increasing maturity of financial markets beyond the U.S., said Geof Marshall, who manages C$250 million of Canadian dollar high-yield debt at Signature Global Advisors, a unit of Toronto-based CI Investments Inc.
“The Canadian-dollar market still has to prove itself to be a viable and deep source of funding,” Marshall said in a telephone interview.
Robert Follis, Bank of Nova Scotia’s Toronto-based head of corporate bond research, predicts sales of Canadian-dollar-denominated high-yield debt of as much as C$5 billion next year from a projected C$3.25 billion this year.
“Growth in the high-yield market is providing a new funding alternative for many companies that would like Canadian-dollar debt on their balance sheet, but are running into limit restrictions with the banks,” Follis wrote in an e-mail.
Companies may sell an additional C$750 million of high-yield debt before the end of this year, said Follis.
“The performance of existing issues in the Canadian dollar market has been solid, setting a good tone for new issuers, and in some cases, for repeat issuance by existing issuers,” he said.
Air Canada in July issued $600 million of five-year notes that yield 9.5 percent and C$300 million of debt of the same maturity yielding 10.375 percent, Bloomberg data show. The airline also sold $200 million of 5.5-year debt that pays 13 percent, the data show.
Armtec Holdings, a unit of Guelph, Ontario-based Armtec Infrastructure Income Fund, last month sold C$150 million of 8.875 percent bonds due in September 2017. The debt was priced to yield 635.4 basis points more than government benchmarks.
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