Borderless bond market draws Canadian companies south to issue

Home may be where the heart is for Canadian companies, yet the U.S. bond market is increasingly where their head's at.

Canadian companies have issued about $69-billion of debt in U.S. markets this year, up 12 per cent from a year ago. That compares with about $93-billion (Canadian) in the domestic market, a similar amount - $70 billion - when adjusted for currency, and a 3-per-cent decline from 2015. The move south is being driven by the lure of lower borrowing costs in America's far larger market, where the high-quality debt of Canadian companies is being lapped up.

The downside for Canadian investors is that deals done south of the border are frequently sold to U.S. investors first. Canadians must wait until those U.S. bond buyers start to sell their notes in the secondary market, which can mean losing out when prices of newly issued bonds rise. Companies meanwhile are chasing the best terms, regardless of geography.

"We're physically located in this particular pond but we're quite a big shark," Steve Roder, chief financial officer of Manulife Financial Corp., said by phone. "So it's quite helpful to have other opportunities."

Manulife, Canada's biggest insurer, re-entered the U.S. dollar market for the first time since 2010 to sell $3-billion of debt, with $1-billion of that sold in Taiwan, according to data compiled by Bloomberg.

"Borrowers are increasingly borderless in terms of how they look at markets, whether it's valuation or strategic," Richard Sibthorpe, Bank of Montreal's head of Canadian debt capital markets, said in an interview at the bank's Toronto office. "It all speaks to the importance of having a North American approach to financing."

Valuation, Strategy

Corporate bond sales in Canada and globally have slumped this year amid periods of volatility, such as oil's bottom in February and the Brexit vote in June, which limited issuance opportunities. Companies such as Telus Corp. and Rogers Communications Inc. tapped the U.S. market, where they found the premium over government debt to be lower than back home, making it more affordable to borrow.

Canada's banks, too, are looking beyond their border for funding programs, in part because "Canada has become too small," according to Moti Jungreis, Toronto-Dominion Bank's head of global markets. TD's number-one growth plan for debt origination, syndication, and trading is in the U.S., and in particular in corporate debt, he said by phone.

Royal Bank of Canada, the top arranger of corporate-bond sales since Bloomberg began collecting the data in 1999, sees issuance elsewhere continuing into 2017. The savings for companies may not be as robust as earlier this year due to interest rate swings, according to Patrick MacDonald, co-head of Royal Bank of Canada's debt capital markets business.

'Be Nimble'

"Go when you need the funding and be nimble and be quick, because the volatility will persist," he said. RBC has done nearly $23-billion (Canadian) in domestic deals this year. BMO is second, with $17.4-billion, according to data compiled by Bloomberg.

Also, the U.S. Federal Reserve raised interest rates this month for the first time this year, to a range of 0.5 per cent to 0.75 per cent, and signaled a more hawkish approach to tightening than the market had been forecasting. The Bank of Canada's overnight lending rate is 0.5 per cent, and traders are betting the bank will be on hold for 2017. Higher rates could eventually drive investors to seek better terms elsewhere.

For now, Canada's bankers see little growth in the domestic market in 2017, in part because companies face fewer debt maturities, according to a RBC report.

Canadian provinces have also been making a foray into the U.S. market as they attempt to lock in lower borrowing costs before interest rates increase further. Alberta sold as much as $2.25-billion of bonds this month, which was its biggest sale in U.S. dollars. Canada's most easterly province of Newfoundland and Labrador also plans to return to the U.S. dollar bond market for the first time in years.

Government Borrowing

The U.S. dollar market may see more Canadian government bonds as next year will see an increase in issuance to a record $240-billion, from an estimated $225-billion in 2016, according to National Bank Financial, the bank that led the ranking of government bond underwriters for a third year. The rise will be driven mainly by the federal government boosting supply to finance its budget deficit. Montreal-based National Bank expects provinces to come to markets with as much as $65-billion of bonds.

Demand for government bonds from Canada is coming from a diverse pool of investors globally and that hasn't changed even after yields worldwide rose amid speculation inflation will pick up, said Sunil Bhutani, head of government finance and syndication at National Bank. The sell-off pushed up yields, erasing as much as $3.9 trillion from the global bond market this quarter, according to a Bloomberg Barclays index.

"Despite the fact that rates have backed up in the last month or so, they are still very attractive and issuers want to take advantage of that," Mr. Bhutani said in an interview at Bloomberg's Toronto office. The bank has arranged almost $29-billion in government bond deals this year. "The other part of the equation is that demand is extremely strong."