RBC Capital Lifts Issuance Forecast on Junk Surge: Canada Credit

Royal Bank of Canada, the top underwriter of Canadian corporate bonds for the past decade, is predicting record issuance this year led by a surge in high-yield debt.

Bond sales in Canadian dollars will reach C$95 billion ($94 billion) this year, on pace to shatter 2006’s record C$93 billion, said Altaf Nanji, senior credit-research analyst at RBC Capital Markets in Toronto. Issuance in the first quarter, typically the busiest of the year, was C$30 billion, according to RBC data. The firm’s forecast in December was for C$92 billion, including about C$5 billion of junk sales.

“The revised forecast puts issuance on pace to surpass our 2006 record year, based on the health of the high-yield sector, an increase in mortgage securitization and a more-active-than-expected first quarter for Maple issuance,” Nanji said in a phone interview.

Investors are snapping up the riskiest debt to meet annual return targets as central banks hold down borrowing costs to stave off recession. Sun Life Financial Inc. altered its investment mandate to add high-yield bonds to the C$115 billion of assets it oversees to offset falling interest rates.

Issuance of high-yield bonds climbed 32 percent to C$1.14 billion in the first quarter, compared with an increase of 11 percent to $109 billion in the U.S. speculative market, according to data compiled by Bloomberg. RBC expects the junk market to grow to C$35 billion of bonds outstanding by 2016, up from C$11 billion currently.

Attractive Conditions

“Market conditions were very attractive, so we refinanced at our first opportunity,” Tom Peddie, chief financial officer at Corus Entertainment Inc. in Toronto, said in an e-mailed reply to questions. “We do not expect rates to drop any further, but we do not see them increasing in the short term.”

Corus, owner of the Treehouse, Nickelodeon (Canada) and ABC Spark TV channels for children, sold C$550 million of seven-year securities to yield a spread of 257 basis points more than a government-debt curve, or about 4.25 percent. Proceeds of the February issue were used to retire debt with a coupon of 7.25 percent maturing in 2017. The new debt was rated BB+ by Standard & Poor’s, one step below investment-grade.

Payrolls Shrink

Elsewhere in credit markets, Canadian government bonds rose after employment in the nation unexpectedly fell in March by the most since the last recession four years ago. The yield of the benchmark 10-year note fell six basis points to 1.73 percent, pushing the 1.5 percent security maturing in June 2023 up 56 cents to C$97.88 at 9:47 a.m. in Toronto. The yield touched 1.72 percent, the lowest level since Dec. 11.

Toronto Hydro Corp. raised C$450 million of bonds maturing in 50 and 10 years. The securities maturing in 2063 were priced to yield 152 basis points more than federal benchmarks, while the 2023 notes yielded a spread of 110.3 basis points.

Bank of Montreal issued $1 billion of five-year fixed-rate securities yielding 80 basis points more than comparable U.S. Treasuries. Ontario issued C$600 million of 3.5 percent notes due June 2043 yielding 3.465 percent, or 103 basis points more than federal benchmarks.

The extra yield investors demand to own the debt of Canadian investment-grade corporations rather than the federal government was unchanged yesterday from the previous day at 122 basis points, or 1.22 percentage points, according to Bank of America Merrill Lynch’s Canada Corporate Index. Yields dropped to 2.73 percent, from 2.76 percent on April 3, the data show.

Spreads on provincial bonds held steady at 76 basis points, while yields fell to 2.49 percent, from 2.52 percent on April 3, according to the Bank of America Merrill Lynch Canadian Provincial & Municipal Index.

Junk Rally

Corporate bonds have returned 2 percent this year, while provincial bonds have gained 1.1 percent and federal-government securities have added 0.7 percent, Bank of America Merrill Lynch index data show.

Relative yields of Canadian-dollar junk bonds dropped to a three-year low of 475 basis points on March 14, according to Bank of America Merrill Lynch’s High-Yield Canadian Issuers Index. The average spread was 496 basis points on April 3, compared with 555 basis points at the start of the year.

The market for foreign borrowers in Canadian dollars, or Maple bonds, is also ahead of issuance forecasts, with C$1.9 billion raised in the first quarter, according to data compiled by Bloomberg. RBC had forecast C$5 billion of Maples for 2013.

Anheuser-Busch InBev NV, the world’s biggest brewer, doubled a Maple bond sale on Jan. 17 to C$1.2 billion. Goldman Sachs Group Inc. sold C$650 million of Maples on Jan. 25.

Regaining Acceptance

The Maple bond market, nicknamed for the nation’s maple-leaf flag, is regaining investor acceptance after issuance froze in 2008 when its biggest users including Royal Bank of Scotland Group Plc sought government bailouts. Issuance is often dictated by currency basis swap rates between the borrower’s home currency and the Canadian currency and whether a company can save money converting loonie proceeds.

“Supply is highly dependent on the global macroeconomic environment and on the dynamics of the swap market,” according to RBC’s 2013 Canadian Credit Outlook published Dec. 12.

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