For the six largest Canadian banks, unsecured consumer debt represents between 9 per cent and 15 per cent of total managed assets, Moody's says. When uninsured mortgages are factored into the mix, unsecured debt comprises between 14 per cent and 24 per cent of total managed assets.Fred Lum/The Globe and Mail
Lending units of Canada's banks were kept busy in 2012 – so busy that the record amount of debt they arranged for clients took some people aback.
"Frankly, I think we were a bit surprised," said Burke Smyth, who heads up Canadian loan syndication for TD Securities.
Some context: the banks came off a record year arranging debt in 2011, as mounting concerns over the crisis in Europe and instability in the U.S. prompted many Canadian companies to refinance their debt early. "That's why when we were trying to forecast going forward, we had serious doubts we would see that kind of activity in 2012," said Mr. Smyth. But thanks to a surprising amount of mergers and acquisitions funded by bank debt, the lenders managed to break through and set a new record of $181-billion in total volume, according to the 2012 league tables data compiled by Thomson Reuters LPC.
CIBC World Markets claimed the title of top bank for loans with $35.5-billion arranged on 122 deals this year, up from its third place rank last year. TD came a close second, with a deal volume of $34.5-billion. Both banks unseated RBC Capital Markets – the top lender of 2011 – who arranged $27.9-billion in loans for clients. The tables give credit to lead arrangers for Canadian syndicated loans (excluding club deals) on a pro rata basis, which means the deal amount is split among bookrunners.
What doesn't appear in the tally is the strong performance of some of the smaller regional banks with strong depositor bases. ATB Financial, Canadian Western Bank and Desjardins Capital Markets were very solid participants in the loan market in 2012. Desjardins acted as a bookrunner on more deals this year, and scored a higher market share of deals as a result.
There were also new entrants to the Canadian market. Raymond James Financial, for example, bought the Canadian assets of Allied Irish Banks in March last year, and Wells Fargo and Co. was recently approved for a Canadian banking licence, allowing it to better service some of its cross-border clients.
But this added competition hasn't hurt the major players. There has been plentiful activity from companies looking to finance acquisitions, and that has made all the difference this year, according to Marc St-Onge, managing director and head of corporate credit products at CIBC World Markets.
In 2010 and 2011 M&A deals were done with a combination of equity exchanged between buyer and seller, and equity sold into the market. There was much less bank and bond financing. What differentiated 2012, was the number of deals done using bank debt, according to Mr. St-Onge. "That's what I think allowed CIBC to take this leadership position, because we were positioned on the right deals during the year," he said.
Getting into that position was a two-step process. First, "we were finally able to convince our clients that the bank market conditions were solid enough to raise multiple billions of dollars in the bank markets to fund those acquisitions," said Mr. St.-Onge. "The second step is our clients observing, with our help, that the bond market was willing and able to fund and take out some of that bank debt."
And that means that whether the bank market is hot or cool, having strong client relationships in place can help push a bank up the tally. For both CIBC and TD, a focus on real estate and the busy energy sector have been keys.
One of the other strengths the big banks have been using to their advantage is pursuing integrated financing solutions. When it comes to choosing equity underwriters, companies are often influenced by which banks have lent them money. And those relationships extend beyond lending. "So where there's an M&A trade we're not just doing the advisory side, we can also say 'Hey! We'll put up the bridge financing, or we'll do the capital markets take out in the form of a bond or equity issuance,'" said Mr. Smyth.
Canada has benefited from its solid reputation after the global financial crisis. "We have really been an oasis through the storm, so I think [clients] see the Canadian model, and the very small amount of loan losses we had through the crisis, and they say that's a really good place to do business," said Mr. Smyth.
In 2013, the banks will likely see fewer benefits from their refinancing businesses, because the pricing environment (that is, bank fees and bank spreads) have been relatively stable over the past 18 months, said Mr. St-Onge. "But what will make the difference is how much M&A uses bank deals this year," he said. If the deals flow, barring more unforeseeable macroeconomic changes, Canadian companies should have a stable Canadian bank market to fund them.