Scotia Capital is betting that the Canadian high-yield market that sprang to life in 2010 isn’t going away any time soon. To profit from the sudden interest, the dealer has put together a desk that specializes in the lucrative paper.
This debt, with yields upward of 7 per cent, was pretty much non-existent in Canada during the decade spanning 2000 to 2010. Scotia believes that’s largely because income trusts supplanted it. With most of the trusts now gone, investors are looking for something that is safer than equities (and is higher up in the capital structure), but pays more in interest than regular corporate or government bonds.
To cater to this market, Scotia put together a five-person team, plus a research analyst who focuses on high-yield debt. Not only is the dealer trying to dominate the new-issuance side of the business, it also wants to provide a liquid secondary market so that investors don’t feel locked in when they buy the paper.
While fewer income trusts could drive high-yield issuance in the future, these securities crept north of the border in 2010 because investors yearned for any sort of yield above the government’s rock-bottom low interest rates. In total, 13 high-yield deals launched in Canada last year, raising about $3-billion. (Scotia led nine of them). Before this, most issuance was done in the U.S., which forced companies to pay for a swap back to Canadian dollars, plus other expenses, such as higher U.S. legal fees.
The latest high yield deal launched Thursday for Vermillion, and other recent high-yield issuers include Quebecor Media, which borrowed $325-million at 7.375 per cent, and Paramount Resources, which borrowed $300-million at 8.25 per cent. Both tapped the market late in 2010.
