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fixed income

More borrowers are having to seek funding south of the border.JONATHAN HAYWARD/The Canadian Press

The Canadian market for the riskiest corporate bonds is disappearing.

Sales of high-yield bonds issued in the Canadian currency have slowed to just one $250-million offering this year, compared with seven issues totaling $1.45-billion through the same period in 2014, according to data compiled by Bloomberg. The collapse in crude-oil prices at the end of last year has quashed borrowing by energy companies, which account for about 40 per cent of outstanding Canadian dollar-denominated high-yield debt.

"The market's at risk of dying or fading away," said Geof Marshall, who oversees about $9-billion of high-yield bonds at CI Investments in Toronto. Compounding the drop in borrowing is the weakness in the Canadian dollar, which has depreciated almost 12 per cent in the past year.

The demise of the market risks increasing borrowing costs for companies by reducing funding alternatives, while eating away at the depth of the secondary market for the securities in Canada. More borrowers are having to seek funding south of the border. Sales in the U.S. by Canadian companies rose to $8.5-billion (U.S.) in the second quarter, compared with $8.1-billion last year, according to Bloomberg data.

Yield premium

As more Canadian companies crowd into the U.S. market, they're being charged a growing premium relative to U.S. peers, according to Merrill Lynch index data. Bonds from Canadian issuers now yield 7.6 per cent on average, or 1.1 percentage points more than U.S. peers. A year ago, they paid 0.8 of a percentage point more.

Brookfield Residential Properties Inc. has been the lone borrower this year in the Canadian high-yield market, selling $250-million (Canadian) in debt through a private placement in May.

Other borrowers such as Calgary-based Bellatrix Exploration Ltd. went to the U.S. to sell $250-million (U.S.) of 8.5 per cent unsecured notes to reduce its borrowing from a bank credit facility. Company spokesman Steve Toth said a factor in deciding to sell U.S. dollar debt was that more than half of the company's shareholders live in the United States.

Canada's high-yield debt market has grown in fits and starts since the late-1990s. It gained traction after the financial crisis in 2010, when central bank rate repression created an appetite for higher-yielding assets.

That "marked the emergence of a meaningful domestic market" for Canadian high-yield bonds, according to RBC Dominion Securities analysts led by Andrew Calder.

Turning south

Since then, "the market never met expectations – there was always more issuance promise than actual development," Richard Kos, who manages about $2-billion of high-yield bonds at Manulife Asset Management Ltd., said by phone from Toronto.

Another issuer that has picked the U.S. over Canada is Cambridge, Ont.-based ATS Automation Tooling Systems Inc., which is rated Ba3 by Moody's Investors Service and BB by Standard & Poor's. The auto-parts maker plans to issue $250-million of notes due 2023, according to a June 8 statement. Chief financial officer Maria Perrella didn't return a call seeking comment.

In January, Southern Pacific Resource Corp. became the first company in the Canadian oil sands to seek creditor protection amid the oil slump. Calgary-based Southern Pacific asked to be shielded while it restructures its debt and pursues strategic alternatives including asset sales, the company said in a Jan. 21 statement.

Last month, Southern Pacific's creditors petitioned to have the company placed in receivership. Chief executive officer Byron Lutes didn't immediately return a call for comment.

That has led investors such as Mr. Kos, who said he now spends 90 per cent of his time analyzing companies with U.S.-dollar debt, to turn south.

"It's a bigger more liquid market," Mr. Kos said.

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