Junk Drought Favoring Acquirers Seeking Financing: Canada CreditAri Altstedter
Lower-rated Canadian companies are seeking to use the country’s junk-bond market to fund mergers and acquisitions as investors take a more forgiving view of the strategy amid a dearth of debt sales by high-yield issuers.
Parkland Fuel Corp. sold debt today and Northern Frontier Corp. is pursuing an issue, both in part to pay for current or recent buyouts, according to people familiar with discussion with underwriters. AutoCanada Inc. closed the sale of C$150 million ($138 million) of seven-year notes yesterday.
Only four high-yield issues totaling $545 million prior to the Parkland sale have been sold this year, the least since 2009, when the market remained frozen following the global credit crunch, according to data compiled by Bloomberg. That’s helped push borrowing costs for below-investment-grade companies to the lowest since 2011. Investors added C$230 million last month to high-yield focused mutual funds, according to data from the Investment Funds Institute of Canada.
“Junk yields are very, very low, so it doesn’t cost much for companies to go on the market and do a bond offering,” Pierre Lapointe, head of global strategy and research at Pavilion Global Markets Ltd., said by telephone yesterday from Montreal. “It makes sense for them to do that and acquire a company.”
The Bank of Canada has kept its benchmark interest rate at 1 percent for the past three years in a bid to boost economic growth by encouraging lending and borrowing. That’s compressed the premium investors demand to own the riskiest Canadian bonds over government debt to 546 basis points last week, or 5.46 percentage points, the lowest since August 2011, according to the Bank of America Merrill Lynch Canada High Yield Index.
“A long period of very low interest rates and moderate economic growth is leading to a little more aggressive financial activity,” Doug Porter, chief economist at Bank of Montreal’s BMO Capital Markets unit, said yesterday by phone from Toronto. “Balance sheets are strong, and interest rates look to remain low for a long time. That’s pretty fertile ground for M&A activity.”
While Canadian firms traditionally haven’t looked to their country’s high-yield market to fund acquisitions, the practice is more common in the U.S. American companies raised a record $85 billion in junk-rated loans for the purpose this year through mid-April, according to data compiled by Bloomberg.
That’s mirrored an acquisition-fueled debt boom in the U.S. investment-grade market, where $533.1 billion in issuance through yesterday has almost matched the $549.3 billion in the same period in 2013, which turned into a record year, the data show.
“The high yield market in the U.S., the big developed market, has traditionally been the place where this stuff has been financed--this is normal for the market,” said Richard Kos, who manages $2 billion in high yield at Manulife Asset Management Ltd., by phone from Toronto May 21. “The Canadian market is much younger, so it’s less developed. I wouldn’t be surprised if this became a staple use of funds for the Canadian market.”
Canadian companies spent $35.6 billion to buy other firms this year, and $13.3 billion this quarter, on pace for the slowest quarter since the first three months of 2011, Bloomberg data show.
“If you were to speak to our investment bankers, their backlog with respect to M&A transactions is starting to really build,” said Bradley Meiers, head of debt syndication at Toronto-Dominion Bank’s TD Securities, in a phone interview yesterday. “So it will obviously lead to more high-yield issuance down the road for sure.”
Red Deer, Alberta-based Parkland, a fuel marketing and distribution company, sold C$200 million of seven-year notes to repay a bank loan and for general corporate purposes after making a $104.86 million purchase in November. The company had originally only planned to sell C$150 million of notes and priced the deal to yield 359.8 basis points more than equivalent maturity government benchmarks. The company has a BB- rating from Standard & Poor’s. It is the company’s third foray into the junk market since 2009.
Parkland spent at least $710.2 million to buy 13 companies since 2007, according to data compiled by Bloomberg. Robert Espey, Parkland’s chief executive officer, said during a May 5 analyst call that he sees “lots of activity” when it comes to future acquisitions.
Northern Frontier, formed in 2011 to “buy and build” an industrial and resource services business, is seeking to sell C$75 million of five-year notes to fund the purchase of a firm that provides water for industrial uses, according to another person who declined to named. S&P rates the Calgary-based company B-.
AutoCanada announced the purchase of eight dealerships in April. On a March 21 call presenting the company’s fourth-quarter earnings, CEO Patrick Priestner said he expected to purchase 10 to 12 dealerships over the next 24 months. The Edmonton, Alberta-based company has a BB- rating from S&P.
“The only difference between now and the last five years is their corporate finance departments can make the economics work to borrow public debt in the market,” said Andy Kochar, who manage C$1 billion in assets at AGF Management Inc., said from Toronto yesterday.