ESG, Project Bonds Set to Surge in Canada After Record Year

Sales of sustainable and project bonds in Canada are expected to take off next year after companies issued a record amount of corporate debt in 2020 to bolster cash reserves and push out maturities.

Issuance of so-called environmental, social and governance securities is poised to grow as some borrowers lock in cheaper financing than through conventional debt sales and the federal government prepares its first green bond. Additionally, national and local governments plan to move ahead with infrastructure projects -- on which contractors may issue bonds -- as part of a wider effort to revive the economy, while banks are expected to continue building up their capital buffers by selling securities known as limited recourse capital notes (LRCNs).

ESG, Project Bonds Set to Surge in Canada After Record Year

It all adds up to a new course for a market that for most of 2020 had been aimed at shoring up the cash reserves of companies looking to ride out the pandemic. While all-in yields are near record lows as the Bank of Canada keeps a lid on on borrowing costs, and spreads tighten as countries roll out their vaccine campaigns, any eventual upticks in risk premiums next year are likely to be seen by investors as entry points, according to Sean St. John, head of fixed income at National Bank Financial.

“There are areas of growth right there,” said St. John, who is also NBF’s co-head of risk management solutions. “The backup in spreads will be seen as an opportunity for investors to buy.”


Companies have sold over C$110 billion ($86.6 billion) of corporate bonds so far this year, a record, according to data compiled by Bloomberg. The prior high watermark was reached in 2017, when companies issued over C$109 billion. Issuance is likely to reach C$100 billion next year, St. John said.

At least C$84.6 billion of corporate bonds have call options or are maturing next year, according to data compiled by Bloomberg. Some companies, including Granite Real Estate Investment Trust and Gibson Energy, have taken advantage of current borrowing costs to pre-fund next year’s obligations.

“We had an opportunity to obtain new financing at a historically low coupon rate,” said Granite Chief Financial Officer Teresa Neto, adding that some of their future acquisitions are already also pre-funded via an equity sale. “Our needs for additional funding in 2021 will depend on the level of acquisition activity.”

The volume of pending or completed transactions with a Canadian buyer or target surpassed $72.7 billion so far in the last quarter, up from $40.1 billion and $27.8 billion in the previous two quarters, according to data compiled by Bloomberg. Excluding stock-only transactions, the deals volume rose to $54 billion from $37.4 billion and $25.6 billion.

Read more: Big Canadian banks prepared for C$31 billion in credit losses

While refinancings may not provide the support for volume as in previous years, some of the cash that companies obtained via revolving credit facilities amid their rush to bolster liquidity may term out in the bond markets as pandemic-era bank provisions evolve.

“In general, corporates are going to have more cash on their balance sheets than they had in the past,” said Brad Meiers, head of debt capital markets and syndication at HSBC Securities Canada Inc.

Sustainable Debt

Sales of ESG-labeled debt are expected to gain more traction as evidence of a pricing advantage over conventional securities mounts.

“They are getting tighter spreads than their non-green bond desks, so certainly there is an incentive for them to move forward with more green bonds,” said Patrick O’Toole, a senior portfolio manager for global fixed income at CIBC Asset Management Inc. “Demand is outweighing supply at the moment.”

The government and private sector, meanwhile, are moving ahead to implement a road map for sustainable financing recommended in 2019 by a panel of experts led by Tiff Macklem, who took over as Bank of Canada governor earlier this year.

The federal government-owned Canada Infrastructure Bank is going ahead with a C$10 billion plan, mostly focused on projects typically associated with the sustainable bond market. Also, a Canadian Standards Association group made up of bankers and company executives is developing a taxonomy for transition finance, which would help companies in key industries such as oil and gas reduce their carbon footprint.

ESG, Project Bonds Set to Surge in Canada After Record Year

A planned 5G spectrum auction could be also a driver of new issues, said National Bank’s St. John. Also at least two of the country’s largest banks haven’t yet issued LRCNs, which began to make their way to the market this year.

Project Bonds

Federal and provincial authorities are unveiling, reviving or speeding up infrastructure projects including expanding subways as part of their plans to kickstart the economy. In the energy sector, Keystone or Coastal GasLink Pipeline Ltd may turn to the bond markets for financing.

“The key theme in 2021 will be the infrastructure bonds as governments seek to put their economies on a recovery path,” said Yves Paquette, a Montreal-based portfolio manager at AllianceBernstein. “That will provide a certain relief to the corporate bond market after a lot of issuers prefunded their maturities.”

Some of those infrastructure projects may be financed via public-private partnerships. For instance, in Quebec, Port of Montreal is in the process of selecting firms to carry out the construction of a new terminal. In Ontario, the province is the process of awarding the winning bidder of the GO Rail Expansion project.

“I expect to see a steady ramp up through 2021, 2022 to 2023,” said Derron Bain, managing director at Concert Infrastructure Ltd. “Infrastructure investment is a key component of economic stimulus moving beyond Covid-19.”

©2020 Bloomberg L.P.

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