The new motto for Canadian corporate bond issuers appears to be "Anywhere but Canada." January is almost up, and, according to Desjardins Capital Markets, we're on track for the lowest tally for issuance by corporations in Canada for the first month of the year since 2007. Beyond Canada's borders, however, corporate fixed income issues have nearly doubled, led by Canadian financial firms.
Canadian corporates have floated just $2.8-billion worth of fixed income securities in Canada this month, compared to $7.4-billion at the same time last year and $11-billion in the same periods in 2013 and 2012, Desjardins says. Meanwhile, there has been an almost 100 per cent jump year-over-year in fixed income issuance by Canadian corporates. So far, the tally is $19.5-billion beyond Canada's borders – more than three-quarters of that from banks and other financial firms – compared to $10-billion by this point last year, according to Desjardins' vice president and senior analyst, Jean-Francois Godin. "This is taking a lot of refinancing money out of the [domestic] market," he said.
There are two reasons for this, according to senior figures in the Canadian bond world. The biggest factor is that Canadian banks have found a huge appetite for their debt internationally, particularly covered bonds, which are triple-A-rated fixed income instruments backed by mortgages. Central banks in Europe apparently can't get enough of them, particularly as the European Central Bank cranks up its asset-buying machine to bolster the continent's sluggish economies. In the last 20 days, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Commerce have issued €4.50-billion ($6.3-billion) in covered bonds to banks in Europe, which are drawn to the high ratings and ability to earn a slightly better return compared to European debt securities.
There is a secondary factor, says CIBC Asset Management vice-chairman John Braive – the amount of Canadian fixed income issues coming due is fairly light in the first few months of this year, totalling only $950-million for January, for example. "There's not a lot of refinancing to do," he said, but added that pace is due to pick up markedly in the last seven months of 2015.
Meanwhile, the provinces are off to a roaring start, picking up some of the slack in the domestic market. So far they've issued $11.4-billion in bonds domestically and internationally, up 10 per cent over the same period last year, reaching a record level, says Mr. Godin.
It will be interesting to see how last week's surprise rate cut by the Bank of Canada reshapes the views of issuers, given most observers were expecting rates to go the other way this year.