Record Loonie Company Bond Sales as Rates Worry Spurs Deals

(Bloomberg) -- Canadian-dollar corporate bond sales reached an annual record, helped by treasurers raising cash before borrowing costs rise. 

Sales of Canadian-dollar corporate bonds reached C$109.2 ($87.62 billion) so far this year after Equitable Bank priced a C$400 million on Thursday, according to data compiled by Bloomberg. That compares to a previous record of C$109.1 billion issued in 2020.

Treasurers in 2021 took advantage of historically low funding costs as central banks kept benchmark rates depressed and provided liquidity to the global financial system during the pandemic. The Bloomberg Canada Aggregate Corporate Total Return Index was between 2% and 2.2% until mid-September. 

That’s when forecasts for higher inflation and tighter monetary policy spurred yields to begin an ascent to their highest level since May 2020, reached earlier this week.

“Corporate treasurers were keen to lock in lower all-in coupons with rates at historical lows,” said Jamie Hancock, head of Canadian Capital Markets at BofA Securities Inc. “There was broad concern with many issuers that we would see rising rates later in 2021 and 2022 on the back of strong economic growth and inflation pressures from Covid-19 related stimulus measures.”

Next year, Canadian dollar bond issuance may be “lighter,” with a big amount of financing already completed, Hancock said.

However, mergers and acquisitions could spark some bond sales, he said.

For example, the announced plan by Rogers Communications Inc. to buy Shaw Communications Inc. for about C$20 billion, one of the largest combinations in Canada, means Rogers may need to refinance its bridge loans in the bond markets. Also, Canadian Pacific Railway Ltd.’s $27 billion purchase of Kansas City Southern, creating the first railroad spanning the U.S., Canada and Mexico, is likely to need bond financing.

“The telecom space is expected to pick up in issuance related to the proposed Rogers acquisition of Shaw,” said Trevor Bateman, head of credit research at CIBC Asset Management. “In the rail sector, industry consolidation could lead to more bond issuance.”

This year’s pace was partly driven by the greatest amount of so-called maple bonds, or securities issued by foreign companies in loonies, in at least 14 years. Verizon Communications Inc. and Goldman Sachs Group Inc. led a list of companies that raised cash in loonies for a total of C$16.2 billion so far this year, up from C$8.1 billion in 2020, Bloomberg data show.  

“Maple issuance doubled last year’s total, driven to a large extent by financial sector issuers motivated by attractive funding dynamics, diversity of funding and opportunity to achieve scale in Canada,” said Rob Brown, co-head of Canadian debt capital markets at RBC Capital Markets. 

Sales of corporate bonds with a least one credit rating below investment grade rose to a record C$15.5 billion, up from C$6.3 billion last year, according to Bloomberg data. Air Canada raised C$2 billion of eight-year securities in the biggest high-yield Canadian corporate bond on record.

Environmental, social and governance labeled transactions more than doubled from 2020, reaching C$11.3 billion so far this year. At least eight real estate firms sold ESG debt, which frequently achieve lower borrowing costs than traditional securities.

Pipeline giant Enbridge Inc. and Telus Corp. sold the first Canadian-dollar denominated sustainability-linked bonds, a type of security that penalizes issuers with higher borrowing costs if they don’t meet certain ESG metrics. 

Canadian dollar-denominated deal volume so far this year is even larger when Royal Bank of Canada’s inaugural sale of institutionally-targeted preferred shares last week is included. That offering, plus sales of private-label securitizations, drive credit securities issuance in Canadian dollars so far this year to over C$115 billion, up from C$113.5 billion in 2020. 

“The possibility of increased M&A-related funding activity, rate volatility, uncertain path of the pandemic and resolution of economic headwinds are wild cards in 2022 that could influence the amount and timing of supply,” RBC’s Brown said. “We are cautiously optimistic that funding activity will remain healthy, although more moderate relative to this year.” 

Americas

Ford Motor Co. is aiming to cut its borrowing costs by more than half as it repurchases $5 billion in junk-rated debt and seeks to set a path to return to an investment-grade credit rating.

• Three companies are looking to sell new U.S. investment-grade corporate bonds on Thursday according to an informal survey of debt underwriters who declined to name the firms.
• Amid persistent fears of inflation and slowing growth, an energy fueled rally has catapulted the riskiest part of the U.S. high-yield market, CCCs, to be the best performing asset class in the U.S. fixed income market year-to-date.
• Jessica Simpson’s company, With You Inc., won court approval for its bid to pay Sequential Brands Group Inc. $65 million for the majority share of the singer-turned-fashion entrepreneur’s brand, according to court documents.
• For deal updates, click here for the New Issue Monitor
• For more, click here for the Credit Daybook Americas

EMEA

A standoff between European bond traders and the central bank has unleashed turbulence across debt markets. Volatility measures for euro investment-grade and junk debt and Italian bonds have spiked to multi-month highs. An iShares corporate bond ETF, Europe’s largest credit fund, endured the biggest swings since April. 

• Investors in Europe’s credit market focused on a slew of deals and bank earnings on Thursday, while digesting the outcomes of the latest Federal Reserve meeting.
• Alstria’s bonds fell the most in 20 months after a bid by Brookfield Asset Management to take the real estate firm private
• Credit Suisse said it will shrink its investment bank and shift more resources to the wealth management unit as part of a restructuring intended to draw a line under a tumultuous year in which it was rocked by the Archegos and Greensill scandals

Asia

The selloff in China’s stressed property developers resumed on Thursday, amid signs of contagion spreading to the onshore market.

• Kaisa Group Holdings Ltd.’s bonds and shares tumbled after a wealth-management product guaranteed by the company missed a payment deadline
• China’s dollar high-yield debt fell for the 10th day in 11 after yields climbed above 21%
• Trading was halted in two yuan bonds from other real estate firms after they plunged more than 20%

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