Canadian companies borrowing in the bond market show no signs of slowing down.
From low interest rates to lower risk premiums, and from mergers to early refinancing – conditions in the past year have been just right to fuel the corporate debt supply. Businesses are on track to hit the highest levels of new debt since well before the recession.
Proceeds from new issuance of investment grade corporate debt are up 29 per cent year-to-date, compared to the same period last year, according to figures from Thomson Reuters.
In the U.S., companies are also taking on more debt, with new issuances gaining 13 per cent.
Money managers and banks projected that 2013 could be a big year for debt, with borrowing costs remaining low and investor base with a healthy appetite for yield.
Demand for high-yield bonds accounted for 13 per cent of total bond issuances in the 12 months ended Sept. 6, according to global investment banking analysis group Dealogic. Junk bonds haven't accounted for such a large slice of new issues since the same period in 2009 when levels hit 14 per cent.
In the U.S., high-yield debt has climbed even higher – up to 25 per cent of the bonds issued this year. But is that too high? Some analysts and academics are monitoring the profitability of these junk bond issuers for signs they could be taking on too much debt, according to a recent report by the Wall Street Journal.
But high yield debt is still very attractive to Canadian investors, according to analysts at RBC Dominion Securities. Junk bonds enjoy a swelling investor base, benefit from fairly low government bond rates and are projected to increase their capital, the analysts said in a recent credit report.
High yield or investment grade, Canadian companies are expected to keep pumping out debt for the rest of the year. RBC raised its Canadian Corporate bond issuance target by $5-billion to $105-billion by the end of the year thanks to two main factors in this increase: strong issuance so far, prospective issuance in the pipeline. Retail, financial and utilities are all expected to contribute to supply.
(Jacqueline Nelson is a Globe and Mail Financial Services Reporter.)
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