Pimco Sees Canadian Bond Sales Hitting a Hard to Reach Record
(Bloomberg) -- Sales of Canadian corporate bonds reached a record this year and in 2020, and one of the world’s largest investors expects another high next year. The banks who make a living marketing those bonds say sales volume will be big, but another banner year may be out of reach.
Canadian dollar-denominated corporate bond sales, including securitizations, surpassed C$135 billion ($105 billion) this year, according to Bloomberg data. That exceeded C$113.5 billion last year, the previous record, and C$109.6 billion in 2019.
Pacific Investment Management Co. says 2022 should produce even higher annual sales, led by bonds for expanding growth as the economy recovers from the pandemic, mergers and acquisitions and for climate and digital initiatives.
“We expect to see a fairly strong year for deal-making both large and small,” said Vinayak Seshasayee, a portfolio manager overseeing Canadian fixed-income assets at Pimco. “So we would expect that would also be a robust source of supply of corporate debt. Capex for next year will be strong, not only as a part of reopening, but also as a part of several other big shifts that are going on in the economy.”
Bankers at some of the largest debt arrangers in the country, including Royal Bank of Canada, National Bank of Canada, HSBC Holdings Plc and Bank of America Corp., agree debt financing will be in demand. Several say sales volume, however, is likely to drop from the 2021 record and be closer to that seen the prior two years.
“We think that the market’s going to revert to a more normalized level of supply,” said Scott Lampard, head of global banking at HSBC Bank Canada, which sees issuance at about C$110 billion to C$115 billion. “You saw a significant increase in bank supply and insurance supply this year, which I think is probably going to come back to a more normalized level.”
National Bank also sees sales below this year’s level, but above the prior years, says Sean St. John, head of fixed income and co-head of risk management solutions at National’s investment banking unit.
The unit’s estimates include about C$87 billion of potential refinancing needs; some C$5 billion to C$7 billion of limited recourse capital notes issued by financial institutions; a continued boom in corporate maple bonds, or deals issued by non-Canadian firms, which this year surpassed $20 billion; and note sales by telecommunication companies, including Rogers Communications Inc., in the range of C$10 billion to C$15 billion.
Sales of environmental, social and governance labeled bonds will provide a significant source of supply, partly because the so-called greenium, or lower relative borrowing cost, is “going to continue to be sustained as there’s just more and more capital that is being deployed around those strategies,” said Lampard.
Some bankers anticipate the launch of transition bonds, or securities that have proceeds committed to projects that help the issuer to migrate toward environmentally cleaner technologies.
Seshasayee of Pimco, which has $2.2 trillion under management, says a year of record bond sales could be derailed if “you see a very sharp rise in interest rates.” While there is “some potential for yields to rise and some potential for spreads to widen a little bit,” he said. “In either case we don’t expect a dramatic change.”
He added that the ongoing Covid-19 pandemic “is a big uncertainty for all of us, but assuming that the whole response to omicron is similar to delta, where it didn’t have a huge impact on overall economic activity, the economic environment should be favorable.”
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