It's time to pause for moment and pay tribute to the humble Canadian homeowner.
As real estate markets continue to melt south of the border, taking down the U.S. banking system in the process, Canadians just keep paying down their mortgages and keeping the banks solvent. And that in turn has translated into one highly successful government program.
The Canada Housing Trust tapped the bond market yesterday for $3.15-billion. It was the latest in a series of relatively low-cost financings for the federal agency that makes housing more affordable by backstopping residential mortgages sold by banks and other financial firms.
At a time when U.S. and European residential real estate is all but radioactive, investors of all stripes flocked to the Canadian mortgage bonds.
CIBC World Markets, BMO Nesbitt Burns, RBC Dominion Securities and TD Securities led the transaction. Doug Bartlett, head of CIBC's government finance team, said the amount of debt outstanding under this program grew 20 per cent, year over year, to $168-billion, which is "a significant achievement for the program, given difficult credit markets over the last year, and it reflects continuing investor confidence in the Canadian mortgage market and the Canada Mortgage Bond product."
The federal housing agency, which guarantees residential mortgages, did a two-tier bond issue, part with a fixed rate that matures in nine years, and a second slug of bonds that mature in five years, and feature a floating rate. Investors were far more interested in the floating-rate paper.
Underwriters sold $750-million of bonds that mature in 2018 and sport a 4.1-per-cent fixed interest rate. This debt proved popular with foreigners: 27 per cent of the deal went to investors outside Canada, a larger slice than what's been seen in the past. Going into this auction, there were expectations that Canada Housing Trust might sell up to $1-billion of this portion of the financing.
However, the floating-rate debt sale garnered enormous interest, and ending up being twice as large as expected, at $2.4-billion. This debt matures in 2014 and the rate is pegged at 18 basis points (a basis point is 1/100th of a percentage point) over three-month CDOR, or the Canadian Deposit Offering Rate, which is a money market benchmark. Domestic investors bought the lion's share of this paper.
Smaller Player Steps Up
In a financing that speaks to the market's hunger for income, mortgage financier Equitable Group broke new ground last week by selling $45-million of perpetual preferred shares.
The innovation on this financing is that a relatively small financial company has won long-term backing from investors, as preferred shares like this are typically popular with the risk-averse, buy-and-hold crowd. The six Big Banks, with their decades of dividend-payment history, have traditionally been the major sellers of perpetual preferred shares.
Now smaller players such as Equitable are spicing up the menu. National Bank Financial and GMP Securities led the offering, and it attracted enormous investor interest.
Equitable sold preferred shares for $25 each that pay a 7.25-per-cent dividend for the first five years, well above the rate offered by the big banks, to reflect the risk of owning a smaller company.
After five years, the dividend on this stock resets every five years at 4.53 percentage points over the comparable Government of Canada five-year bond.
"In our view, the issue will strengthen the company's capital base and allow it to continue growing," said a report from Atul Shaw, an analyst at BMO Nesbitt Burns. The public bought $36-million of this issue, while Canadian Western Bank snapped up an additional $9-million in a private placement.
Blackmont Hires Jarmai
Blackmont Capital has a new head of investment banking, with Tom Jarmai joining the brokerage house from Desjardins Securities.
Mr. Jarmai's specialty is financial services companies, and on his watch, Desjardins punched above its weight in this sector. There's an element of turnabout in Mr. Jarmai's decision to take the next step in his career at Blackmont. His predecessor at the dealer, Kevin Dalton, left in December to become head of investment banking at Desjardins.
In addition to working at Desjardins, where his corporate finance team added new wrinkles to the preferred share market, Mr. Jarmai was on the board of governors at CI Mutual Funds, a unit of CI Financial, which also owns Blackmont. He took a brief break from the Street to teach finance to college students, and spent the 1980s and 90s as a top-ranked financial services analyst with RBC Dominion, Scotia Capital and First Marathon Securities.
See Andrew Willis's Streetwise Blog at ReportonBusiness.com
