CIBC World Markets Corp. says a new type of bond has opened up the debt markets to mid-sized companies seeking to issue debt without diluting existing shareholders’ stakes.
The listed bonds are similar to convertible debentures in that they trade on an exchange, making them more accessible to yield-hungry retail investors looking to invest in familiar names. But unlike convertible bonds, these offerings can’t be converted into equity, nor do they come with warrants attached, so current shareholders won’t experience dilution.
CIBC has done four such deals in recent months and the bank predicts more to come. The latest, a $100-million bought deal for Fiera Capital Corp. bearing a 5.6-per-cent interest rate, started trading last week.
Tyler Swan, managing director and head of execution in the equity capital markets division at CIBC, said there are at least 50 other Canadian public companies that are about the right size to find the new product a compelling alternative to convertible bonds.
Referred to as senior subordinated unsecured debentures, the bonds rank below bank debt but above some types of capital markets debt, Mr. Swan said.
“There are a lot of mid-cap Canadian companies that are strong, cash-flow-producing companies and growth-oriented companies but they don’t necessarily have great access to the term debt market; they finance themselves largely with bank [debt],” Mr. Swan said.
Investors, meanwhile, appreciate the transparency of exchange-listed products, which are easier and less expensive to trade compared with traditional bonds. While individual investors have been receptive, interest from institutional investors is also growing, Mr. Swan said.
“They can click online and see exactly what the price is,” Mr. Swan said. “It’s just like trading stocks or even convertible debentures.”
Still, Montreal-based independent asset manager Fiera was hesitant when its bankers first floated the idea earlier this year.
“I just wasn’t sure how much demand there was out there for the product," said Lucas Pontillo, Fiera’s executive vice-president and global chief financial officer. “Although it was a bought deal, you always want to make sure the bonds can trade properly in the market after the fact."
CIBC, along with a syndicate of other underwriters, had done two such deals – a $75-million bought deal for Mississauga-based cargo airline Cargojet Inc. with a 5.75-per-cent coupon and a $75-million offering with a 5.4-per-cent coupon for agricultural equipment manufacturer Ag Growth International Inc. – when it approached Fiera.
In March, the banks brought a third deal to market – a $100-million offering from Cargojet, even bigger than its initial transaction, which was later increased to $115-million.
“That’s when it piqued my interest," Mr. Pontillo said. “When they were able to demonstrate that Cargojet managed to do two offerings in the span of six months, that was quite encouraging. It gave the instrument a lot more credibility.”
Although Fiera’s president and chief operating officer Vincent Duhamel admits that “it took a little bit of convincing,” the company ultimately decided that the new bond offering would help it achieve its goal of diversifying its capital structure. CIBC and RBC Dominion Securities Inc. were joint bookrunners on the deal, and the syndicate included Desjardins Securities Inc., BMO Nesbitt Burns and Scotia Capital Inc.
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