Corporate Sales Primed for Another Record in 2013: Canada Credit
Canadian firms are poised to exceed 2012’s record bond issuance next year as they take advantage of the lowest borrowing costs in two decades amid a slowing economy.
Companies including Telus Corp., Alimentation Couche-Tard Inc. and RioCan Real Estate Investment Trust issued C$89.4 billion ($89.3 billion) in the past 12 months as yields on a broad index (SPTSX) of Canadian-dollar corporate debt dropped to 2.89 percent this month, the lowest since at least 1992. Corporate fixed-income returns exceeded those on the Standard & Poor’s/TSX Composite Index for a second straight year.
“We could see a nice record year in 2013 in corporate bonds,” said Patrick O’Toole, a Toronto-based money manager who helps oversee C$70 billion at Canadian Imperial Bank of Commerce’s CIBC Global Asset Management. “We don’t see any change to what’s happened in the last four or five years of investors saying ‘stock market volatility is tough to stomach. I want to be better diversified’ and importantly, ‘I want to be paid for my investments.’”
Corporations will issue as much as C$96 billion of debt in 2013, according to Royal Bank of Canada projections, with domestic financial institutions selling the majority, or C$52 billion, driven mostly by maturities.
Royal Bank, Canada’s largest lender, forecast C$23 billion in sales by non-financial corporations, as much as C$10 billion in securitizations, about C$6 billion in high-yield debt and C$5 billion in issuance from companies outside Canada.
Issuance surged to a record this year in Bloomberg figures dating back to 1999, as companies looking to lock in low borrowing costs found investors seeking to improve on government bond returns. These conditions will likely continue, with the central bank holding rates steady at 1 percent until the final quarter of 2013, according to the median forecast in a Bloomberg News survey of 23 economists.
“I expect a robust new issuance calendar in 2013,” Susan Rimmer, head of corporate and financial debt capital markets at Canadian Imperial Bank of Commerce, said in an interview in Toronto . “We witnessed record new issues in 2012 and I would expect in 2013 the same kind of conditions are going to persist.”
Elsewhere in credit markets, the extra yield investors demand to own the debt of Canadian investment-grade corporations rather than the federal government fell one basis point to 135 basis points last week, or 1.35 percentage point, according to Bank of America Merrill Lynch data. The spread between corporate and federal government debt has narrowed 48 basis points this year. Corporate bonds have returned 6.55 percent percent this year.
In the provincial bond market, spreads widened one basis point to 74 basis points last week from the week before, and widened four basis points this year. Provincial bonds have returned 3.31 percent in 2012, while federal government bonds returned 2.34 percent.
Canada’s benchmark 10-year bonds fell, pushing the yield up 4 basis points to 1.1 percent at 10:02 a.m. in Toronto. The 2.75 percent security maturing in June 2022 declined 34 cents to C$108.17.
Equity volatility has risen on concern U.S. lawmakers will fail to reach a deficit reduction deal in time to avoid tax increases and spending cuts set to take effect tomorrow. The Chicago Board Options Exchange Volatility Index, known as the VIX, reached its highest level since November 2011 last week relative to the CBOE S&P 500 3-Month Volatility Index, data compiled by Bloomberg show.
Canada’s gross domestic product grew 0.1 percent in October after stalling in September and shrinking 0.1 percent in August, Statistics Canada said on Dec. 21. The economy will slow to a 1.8 percent rate of growth in 2013, from 2 percent this year and 2.6 percent in 2011, according to the median estimate of 29 analysts surveyed by Bloomberg. That would be the slowest annual pace since the recession of 2009. The U.S. consumes about three quarters of Canada’s exports.
If the U.S. avoids recession, corporate issuance next year may surpass RBC’s C$96 billion projection, which was based on “a very cautious” scenario, said Altaf Nanji, senior credit- research analyst at RBC Capital Markets.
“There’s a lot of torque in the system,” Toronto-based Nanji said in a telephone interview. “If you can alleviate some of the roadblocks it really could take off.”
Telecommunications operators may turn to debt markets to finance bids in wireless spectrum auctions the government plans to hold in the first part of next year, Nanji said, predicting the companies will issue C$2.5 to C$3 billion in 2013.
Another boost to issuance next year may come if pipeline projects such as TransCanada Corp.’s Keystone XL project, which is under U.S. government review, gets approved, according to Darcy Briggs at Franklin Templeton Investments Corp.’s Bissett Investment Management.
“Should some pipeline capacity be approved then a number of pipeline projects that are on hold currently could need funding, which would mean increased issuance,” said Briggs, a Calgary-based money manager whose firm oversees C$4.3 billion in fixed-income assets.
Appetite for lower-rated deals may sharpen on any signs of improvement in the global economy as risk appetite improves.
“Within the investment grade corporate bond market we expect to see a gradual movement down into the triple-B category, from the A and AA category, in part from the search for yield,” Robert Follis, a credit analyst at Scotiabank said in a phone interview from Toronto. He expects issuance to fall next year as investors opt for stocks.
However Paul Tepsich, who manages the C$62.8 million Advantaged Canadian High-Yield Bond Fund for the Bank of Nova Scotia at High Rock Capital, predicts the growing number of retirees in Canada will help drive Canadian debt issuance to new records in the coming years as investors seek yield more reliable than stock dividends, he said.
The growing appetite for yield will particularly favor speculative-grade bonds, said Tepsich. Companies sold a record C$4.4 billion of Canadian-dollar high-yield debt this year, 52 percent more than in 2011, data compiled by Bloomberg show.
Canadian junk bonds returned 16 percent this year, including reinvested interest, and investment-grade corporate bonds gained 6.5 percent. That beat stocks on the TSX, which made investors 6.1 percent with dividends reinvested.
“The one thing in capital markets in North America that won’t change is the baby-boomers are hitting 60,” Tepsich said. “In a low-interest rate environment, which I think we’re going to see for more than three years, we’ll continue to see them kind of grind towards true yield as opposed to equity-based dividend yield.”
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