Record levels of corporate borrowing boosted the fixed-income markets to unforeseen highs in 2013, but the party's not likely to last another year.
Canadian companies – especially financial institutions – rushed to tap the bond market last year in an effort to beat an expected rise in interest rates and borrowing costs, resulting in unprecedented volumes of corporate bonds being issued. Excluding self-funded deals, investment banks brought 400 corporate and government issues worth $177.1-billion to market, according to data from Thomson Reuters.
"It was a real coming-of-age year for fixed income in Canada," said Susan Rimmer, head of debt capital markets, corporate and financial institutions at CIBC World Markets, which raised $31.7-billion for clients last year.
The opportunity to borrow money at low rates was a key factor in persuading issuers to come to market. The Bank of Canada's reluctance to raise its benchmark interest rate, combined with low inflation and the decision by U.S. policy makers to hold back on tapering the Federal Reserve's bond buying stimulus program, helped to put a lid on interest rates for much of the year.
"Most of the corporate borrowers … were successful in locking in fixed-rate coupons that were probably some of the lowest coupons that will be printed on their balance sheets ever," Ms. Rimmer said.
But the outlook for 2014 is less rosy. "We're seeing that there's going to be a reduction in corporate issuance. Because of the record last year, [companies] just need less going forward," said Moti Jungreis, head of fixed income, currencies and metals at TD Securities, which did $33.8-billion in bond deals last year.
Patrick MacDonald, co-head of debt capital markets at RBC Dominion Securities, agrees that 2014 won't be as robust as last year, and said the supply of financial institutions' debt is already down roughly 30 per cent, while other corporate issuance is also down modestly. The country's largest bank worked on 174 new issues worth nearly $38-billion in 2013.
But lower activity at home could create opportunities for banks to build their businesses beyond North America, Mr. MacDonald said.
"The focus was very much in Canada and the U.S. in 2013 … this year we think there will be increased opportunity for the Canadian banks to look abroad, meaning outside of North America."
The stabilization of the European economy is driving a higher appetite for credit, and fixed-income investors are "playing in more significant size" than they did in the last couple of years, Mr. MacDonald said.
There's still a healthy demand for debt coming from institutional investors, such as pension plans and asset managers with a lot of cash.
As new issuance slows down, these investors will have more trouble getting the product they need, and corporate spreads will tighten, Mr. Jungreis said. "We see it in Canada and the U.S."
When TD began work on a $5-billion bond sale for Newfoundland and Labrador's Muskrat Falls power project Mr. Jungreis said people were "fairly worried" about the size of the deal, but it wound up being oversubscribed, a sign of the market's appetite for fixed income.
The steady demand for bonds contributed to one of 2013's big triumphs – the volumes of large deals over $1-billion.
Ten years ago, if a blue chip, investment-grade Canadian corporations wanted to raise $1-billion, it would probably have had to go to the U.S. market, Ms. Rimmer said. "But now they're all printing billion-dollar benchmark trades in Canada. It's exciting for the fixed-income community – the borrowers, the investors, the dealers."
Some companies, such as Bell Canada, even came back for seconds and thirds. The company did three deals for a total for $3-billion.
"The pricing was comparable, if not better, to what they could have achieved in the U.S. market," RBC's Mr. MacDonald said.
But as the supply of new issuance slows this year, major investors seeking yield may have to make sacrifices, either taking on debt with longer-term maturity dates, moving down the credit curve, or rotating into equities, according to Mr. Jungreis. "It's already happening."