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Insatiable appetite for yield drives deal making

A Chartwell REIT-owned retirement residence in Toronto's west end.

Fred Lum/Fred Lum/The Globe and Mail

After a few years riding the roller coaster that is the post-crisis stock market, Canadian investors have decided nothing is sweeter than shares that pay them cash.

Even in a country where natural resources dominate, the hottest stocks today are those that pay the most stable distributions: real estate investment trusts, pipelines and utilities. Investors are fed up with being burned by volatile commodity prices, and have instead opted for portfolios stuffed with less exciting investments.

"It is a market that has an insatiable appetite for yield," said Peter Myers, head of Canadian investment banking for BMO Nesbitt Burns Inc. At first, the demand gave yield-rich shares a boost. Since the S&P/TSX Composite Index hit its high near 14,300 on April 5, the broad market has plummeted 11 per cent. But the S&P/TSX Capped REIT Index has jumped 8 per cent – and it still pays a 4.8-per-cent yield.

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Now, the market is changing. Much like stocks with rich payouts, Canadian high-yield bonds have become a go-to product for investors seeking income.

The ease with which high-yielding companies can raise money has also spurred a flurry of acquisitions.

A prominent example of such takeovers is Cominar REIT's $904-million purchase of Canmarc REIT, an owner of shopping centres, office buildings and industrial properties. Before the deal – which began as a hostile bid by Cominar last fall and turned friendly in January – Canada had not seen a major real estate investment trust takeover in years. The timing was certainly guided by Cominar's strong share price, allowing it to easily raise $434-million over the past six months to help fund the deal.

The same is true for a number of recent asset purchases. When Chartwell Seniors Housing REIT announced a $931-million acquisition of new retirement suites, the firm subsequently launched a $310-million financing to help pay for the deal.

Outside of real estate, Veresen Inc. raised $300-million to fund its $920-million purchase of midstream assets in the Cutbank Ridge region of Alberta and British Columbia, and AltaGas Ltd. raised $403-million when it made its $1.1-billon (U.S.) play for U.S. natural gas distribution and storage utilities.

Historically, retail investors tended to claim the bulk of such financings – usually near-retirement baby boomers who needed to supplement their incomes. But lately, more institutions have been buying in, demonstrating that even the most sophisticated portfolio managers now clamour for yield.

"In many deals, institutions accounted for the majority of demand." said Sante Corona, head of equity capital markets at TD Securities. He would know: TD led the Canadian equity league tables last year, and his firm was also the bookrunner for deals such as Veresen's.

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Institutions are so hungry for dividends that they have also been buying up Canadian high-yield bonds, securities that for years would not sell north of the border. These bonds, which typically pay 7 to 10 per cent a year, are common in the United States, but they barely made a blip in Canada until government yields plummeted to rock-bottom levels.

Unlike REITs or utilities, high-yield bonds pay high interest rates because they are much riskier investments.

For that reason, some of them took a severe hit when political squabbling over the U.S. debt ceiling sent the markets reeling last August, and was then followed by Europe's economic unravelling. No one was quite sure if the nascent market would come back, but sure enough, the demand for yield was so heavy that portfolio managers sat on the sidelines for only a few months, said Susan Rimmer, head of debt capital markets at CIBC World Markets. Activity picked back up late last year, and to date in 2012 almost $1-billion high yield debt has been raised.

Despite these market changes, even the most seasoned bankers and traders acknowledge that the hunt for yield can drive only so much deal making. Energy and materials stocks, which tend to pay little or no dividends, make up 50 per cent of the TSX, said Peter Buzzi, head of mergers and acquisitions at RBC Dominion Securities, and those fundamentals aren't going to change any time soon.

So while that hunger for stability can and should send yield stocks soaring. "Does that mean we're moving away from resources? I don't really think so."

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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