Banks Rejuvenate Maple Bond Market as Fund Managers Cry for Moreby
Morgan Stanley, HSBC sold Canadian dollar debt in recent weeks
Shortage of supply keeps local fund managers vying for deals
The world’s largest banks are breathing life into the maple bond market after years of malaise in the aftermath of the global financial crisis.
Morgan Stanley sold C$1 billion ($765 million) of bonds in the Canadian dollar last month, following HSBC Holdings Plc’s debut maple bond sale from November and Wells Fargo & Co.’s three loonie-denominated debt offerings earlier in 2016. Bond sales by issuers based outside Canada accounted for only 12 percent of all Canadian dollar corporate issuance in 2016, compared with as much as 38 percent in 2007, according to data compiled by Bloomberg.
Sales in what a decade ago was the fastest-growing market for worldwide borrowers crumbled after the financial crisis and have remained subdued since, yet things could change this year. There’s a shortage of bond supply and investors are looking for yield as the Bank of Canada has kept its key interest rate unchanged at a near-record low of 0.5 percent since September 2015.
This makes funding in the Canadian dollar more favorable for issuers, according to Bradley Meiers, managing director and head of debt syndication at HSBC Bank Canada.
“The main reason why we hadn’t seen a lot of maple issuers until recently is because pricing didn’t work,” Meiers said in an interview. “Now pricing is competitive and there is demand, so you will see more maple issuers. This is a perfect environment.”
An option to cut rates remains “on the table,” Bank of Canada Governor Stephen Poloz said last month. While overnight index swaps show investors see tightening as more likely, there’s speculation U.S. President Donald Trump’s policies could push Canada into more easing.
The U.S. Federal Reserve, on the other hand, increased rates in December and announced there’s more tightening to come.
A shortage of supply and diversification means local fund managers are battling over what few maple issues there are, according to Bill Girard, who manages corporate bond portfolios at Bank of Nova Scotia’s 1832 Asset Management.
“Non-financial issuers would be most appealing,” Girard said. “If you saw a company life Pfizer Inc. issue a maple bond, it would be a food fight.”
Banks, along with auto manufacturers, represented the bulk of the C$11.5 billion of bonds issued in the Canadian dollar by foreign companies last year. Wells Fargo was by far the biggest issuer, coming with C$1 billion dollar bond sales three times last year. Both HSBC and Morgan Stanley opened books with a target size of at least C$500 million and ended up selling twice as much.
Canadian fund managers would most eagerly welcome foreign issuers ready to come to the market more often than once every few years as that would improve liquidity, said Jeff Herold, chief executive officer at asset manager J. Zechner Associates Inc. in Toronto.
“There’s demand for good credit at a fair price,” Herold said.