To extend a record run of corporate borrowing, investment banks are hoping to persuade a brand new set of companies to come to Canada and tap the credit markets in 2014.
Canadian corporate debt issuance smashed records this year, with borrowers raising more than $120-billion, according to RBC Dominion Securities, beating the previous peak of $94-billion set in 2012. Financial institutions led the charge: Bank borrowing skyrocketed 40 per cent to $54-billion, or nearly half of the new bonds.
The market was also helped by a number of major transactions. Sobeys Inc.’s $5.8-billion purchase of Canada Safeway and Loblaws Cos. Ltd’s blockbuster acquisition of Shoppers Drug Mart Corp. created big financing opportunities, as the buyers needed to borrow money to help pay for their deals.
But mergers and acquisitions are always unpredictable, and many economists and market watchers expect longer-term interest rates to climb next year as the U.S. Federal Reserve scales back its massive bond-buying program. That means companies with enough cash in their coffers may simply sit tight. To keep their fixed-income business thriving, investment banks are targeting new groups of borrowers, such as foreign corporations and riskier companies that pay higher interest rates to investors.
“Canada’s a market [where] the issuers often dictate that amount of supply that we see,” said Patrick Macdonald, RBC’s co-head of debt capital markets. Even if investors are hungry for bonds, companies simply may not be looking to borrow. “One of the opportunities we see is to import more of the global issuers.”
Bonds issued by foreign entities in Canadian dollars are known as ‘maple bonds,’ and traditionally these securities were sold by the likes of KfW, the German government-owned development bank, which means they carried a sovereign guarantee. The list of maple issuers is now growing, and in 2013 big corporations joined the mix, such as AT&T Inc. and BHP Billiton Ltd., which raised $1-billion and $750-million in Canada, respectively.
Higher-risk issuers such as junior miners can also expect to be pitched aggressively by bankers. These types of companies are known as high-yield borrowers because they pay investors a higher rate to compensate for the greater likelihood that they will not be able to repay.
These bonds can be an attractive source of funds for companies that can’t tap shareholders for money. After a terrible year for mining firms – the S&P/TSX materials index has dropped 30 per cent, and many smaller gold companies have lost half of their value this year – many of them are unable to issue new stock to pay for exploration or mine development.
So they must borrow, and the terms on high-yield bonds are typically more favourable than on traditional bank loans, which come with strict covenants that dictate how the companies must be run. “Compared to borrowing from a bank, the covenants are very, very soft,” said Egizio Bianchini, co-head of BMO Nesbitt Burns’ mining and metals investment banking group.
Even without a big influx of foreign or high-yield borrowers, the corporate debt market’s strong run likely still has some legs. There are a “pretty substantial” number of debt maturities in 2014, and many companies can be expected to re-issue the bonds that mature, said Richard Sibthorpe, BMO’s head of debt capital markets.
2013’s scorching debt market caught many people by surprise. Although the year started out with a bang, 10-year bond yields jumped a full percentage point over the summer because investors feared the U.S. Fed would begin scaling back its bond-buying program. That cooled the corporate market for a while, but once those fears subsided and bond yields stabilized in the fall, borrowers rushed back in.
The fear of the Fed’s so-called taper “really encouraged a lot of complacent issuers who thought that rates would be low forever to maybe get off the sidelines and look to access the market before rates increased even more,” said Rob Brown, co-head of debt capital markets at RBC.