Bond investors prove they’re still hungry for deals

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Corporate bond issuers are quickly learning that fixed-income investors will gobble up any high-quality debt that comes their way.

Because of a slow start to the year for debt issuance, bond buyers have been waiting patiently to get their hands on new offerings. Now that companies are finally tapping the market for fresh funds, investors are lunging at deals.

Their hunger isn't strictly a Canadian phenomenon.

A couple of weeks ago, more than $50-billion (U.S.) of investment grade debt was issued in the United States, the country's second highest weekly total on record, while the Canadian market roared back to life with billion-dollar issues from companies such as Enbridge Inc. and Rogers Communications Inc.

Last week wasn't as lucrative in Canada, largely because of a school holiday in Ontario, but the United States remains hot.

The flurry of activity has turned the market on its head. After another record year for bond deals in 2013, debt issuance cooled in January and February, suggesting that a long-predicted slowdown had finally arrived.

As of the last week of February, corporate and financial debt issuance was down 22 per cent in Canada from the year prior, according to CIBC World Markets, which attributed much of the drop to a lack of bank deals.

Now there are signs that 2014 might not be so subdued. After a few weeks of increased activity, roughly $17-billion (Canadian) worth of debt has been sold by Canadian corporate and financial issuers since Jan. 1, in line with issuance levels at the same point in 2013.

However, some strategists hesitate to call this a trend. Even though demand remains robust, with recent deals receiving far more orders than the actual size of the offerings, it remains to be seen whether issuers will continue to sell more bonds.

Scores of them tapped the market last year, and financing for major events such as the wireless spectrum auction are more or less in the past.

"Is it here to last? I know the new pipeline issue is well stocked, but it's not exceptional," said Desjardins Securities Inc. fixed-income strategist Jean-François Godin. Because it's so early in the year, "it's hard to talk about a trend."

Still, Canadian investors seem ready and willing to buy more. Recent offerings have shown high-quality issuers that they can get deals sold without offering much of a price discount to new buyers. Moreover, their yield spreads over benchmark Government of Canada bonds are incredibly tight, giving them extra incentive to issue new debt.

Demand also remains robust for government debt sales. On Thursday Canada Mortgage and Housing Corp. sold $5-billion worth of Canada mortgage bonds, and they were scooped up in no time. Total government issuance remains subdued, however, because the provinces have slowed their borrowing during budget season, and many are waiting for the new fiscal year to start on April 1 before they rev up their engines.

While heavy demand provides for a healthy debt market, it can also work against the investors themselves.

More than 30 of the country's largest debt investors have come together to lobby for better protections from corporate debt issuers. If these same institutions scoop up everything in sight, the issuers have little reason to address concerns over debt covenants, the contracts that govern the relationship between the issuer and the buyer.

"There's no question that [the robust demand] makes it harder," said Jack Alvo, head of Manulife Financial Corp.'s Canadian public bond credit team, and one of the principals behind the protection push.

"Even if you get 10 big players that decline a deal because they think a [debt] covenant package is inadequate, there'll be another five big players and 30 small players and the deal will get done."