Quebecor Leads Junk Bonds to `Heroic' World-Beating Returns: Canada Credit
Junk bonds in Canada are outperforming the rest of the world’s high-yield, high-risk corporate debt market by the most since January as the country’s relative fiscal health attracts investors concerned that Europe’s sovereign debt crisis may worsen.
The Bank of America Merrill Lynch Canada High Yield Index, which tracks 18 bonds with a par value of C$4.7 billion ($4.7 billion), is up 0.6 percent since the end of October, compared with a loss of 0.9 percent for Merrill’s Global High Yield Index. The Canadian broad market index is down 1.5 percent.
Speculative-grade companies such as Quebecor Inc. and Corus Entertainment Inc. have issued a record amount of debt in 2010, encouraged by demand for assets in Canada, which has the lowest debt to output ratio among Group of Seven countries. Global high-yield returns have lagged behind amid concern that an 85 billion euro ($113 billion) bailout of Ireland may fail to avert a wider European debt crisis.
“The tone in the market has been positive,” Joanna Zapior, head of corporate bond research at CIBC World Markets, said by phone from Toronto. “The Canadian high-yield market has shrugged off any hiccups in global markets.”
Canadian firms set a record last month with five high- yield, or junk, bond offerings worth C$930 million, Zapior and her colleagues Adam Bulley and Craig Wilson wrote in a Dec. 2 report. Issuance for the year was a record C$3 billion, according to data compiled by Bloomberg.
Canadian junk bonds outperformed global peers by 2.2 percentage points in November, the most since the 5.5 percentage-point advantage in January. The Canadian index lagged behind in September and October.
More Junk Sales
December will likely see “a couple more” high-yield sales, with more to come in January, Zapior said. She declined to provide names of potential issuers.
Elsewhere in credit markets, the Bank of Canada held interest rates steady at 1 percent for a second straight meeting yesterday. Policy makers said they will remain careful about future interest-rate increases as falling exports and Europe’s sovereign-debt crisis hinder the economic recovery. The decision to stand pat was anticipated by all 24 economists surveyed by Bloomberg News.
The extra yield investors demand to own the debt of Canadian investment-grade corporations rather than the federal government narrowed yesterday to 142 basis points, or 1.42 percentage points, from 141 the day before, according to a Bank of America Merrill Lynch index. Yields rose to 4.01 percent, from 3.91 percent.
Provincial Bond Market
The securities lost 0.85 percent in November as a drop in bond prices drove yields to 3.91 percent on average, from 3.64 percent on Oct. 31. They are down 0.8 percent this month.
In the provincial bond market, relative yields narrowed yesterday to 54 basis points. Yields rose to 3.31 percent, from 3.21 percent on Dec. 6. The securities lost 1.2 percent in November, the biggest loss since December 2009, and are down 1.5 percent this month.
Ontario paid 46 basis points over federal benchmarks to sell C$750 million in a reoffering of its 3.15 percent bonds maturing in September 2015. The sale brings the total outstanding to C$2.25 billion.
Housing starts rose in November to 187,200, from a revised 167,800 in October, Canadian Mortgage and Housing Corp. reported today. That beat the median forecast in a Bloomberg survey of 21 economists that called for a rise of 173,000.
Canada sold C$3.2 billion of three-year debt, drawing an average yield of 2.091 percent. The government received bids of C$7.8 billion for the 2 percent securities maturing in March 2014, according to a statement today on the Bank of Canada’s website.
“Almost Heroic Return”
Relative yields of Canadian high-yield bonds over federal benchmarks narrowed to about 4.95 percent at the end of last week, from as high as 15 percent in April 2009. They ended yesterday at 496 basis points, compared with 601 for Merrill’s global high-yield index, which comprises 2,523 bonds with a par value of $1.2 trillion.
Canada’s high-yield index is a “small, concentrated index” with a slightly higher average credit rating than the global index, according to Preston Peacock at Bank of America Merrill Lynch. The yield on the Canadian index ended Dec. 6 at 7.45 percent, compared with 8.06 percent globally.
High-yield, high-risk bonds are rated below Baa3 by Moody’s Investors Service, less than BBB- by Standard & Poor’s and lower than BBB(low) by DBRS Ltd. The Canadian high-yield index is rated the equivalent of BB3, or a notch higher than the average rating on the global index, Peacock said.
Yield, Credit Quality
“The Canada High Yield Index scored a positive return in a tough month for bonds in general and credit in particular,”, Peacock and his colleagues Phil Galdi and Steve Vaccaro in New York, wrote in a Dec. 3 report to clients. “Compared to the global high yield index or even the Canadian government index, this is an almost heroic return.”
“What is happening here is that you’ve got yield and you’ve got slightly better credit quality,” Peacock, director of portfolio strategy, said by phone from New York. “The particular issuers represented in the Canadian high-yield index have done very well, relative to the much larger global high- yield universe.”
Bonds of Quebecor, the Montreal-based cable-television operator, returned 2.2 percent in November, the best performance among the high-yield index’s 15 issuers. Corus, also based in Montreal and the owner of the YTV television network, climbed 1.1 percent. North American Energy Partners Inc., the Calgary- based provider of oil-sands services, advanced 2.1 percent.
The Canadian high-yield index is headed for a 23 percent return this year, the second-best annual performance in the 12 years since Merrill started tracking the data. It returned 32 percent last year.
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