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Canadian Bankers Expect a Bond Boom

By Vipal Monga 

TORONTO -- Investors and bankers in Canada's corporate bond market are expecting a surge of new corporate borrowing, after the Bank of Canada said it would buy Canadian corporate bonds for the first time on Wednesday.

"It definitely helps new issuance," said Andrew Becker, head of Canadian investment-grade debt origination at TD Securities, the investment-banking arm of Toronto-Dominion Bank. "This is constructive for the market."

The Bank of Canada said on Wednesday that it would buy as much as 10 billion Canadian dollars ($7.08 billion) of corporate bonds, because the market for corporate debt "continues to show signs of stress." The bank said it would buy high-quality corporate bonds in the secondary market for the next 12 months.

The central bank's decision to buy investment-grade corporate debt comes weeks after the Fed made a similar announcement. The move helped boost U.S. credit markets.

While U.S. issuance has surged, Canadian borrowing has been slow to revive. Canadian nonfinancial corporate issuance totaled US$3.4 billion in March, a 30% drop from a year ago. There have been tentative signs that Canadian investors have been taking a cue from the much larger U.S. market and becoming comfortable buying debt. Issuance for this month, as of April 14, totaled $3.7 billion, already exceeding last month's total.

"Why wouldn't you issue here if you had the need for capital and for liquidity?" said Altaf Nanji, a managing director at Toronto-based Manulife Investment Management who manages about C$22 billion in fixed-income assets. He said yields for corporate bonds relative to benchmark Canadian debt -- known as the spread -- fell 0.15 percentage point in the aftermath of the Bank of Canada's Wednesday announcement.

Yields fall when bond prices rise, so lower levels mean bonds are fetching higher prices. Wednesday's move intensifies a gradual improvement that has been taking place since the Bloomberg Barclays index of Canadian corporate bond spreads hit a peak of 2.74 percentage points in late March, up from 1.00 point in mid-January. On Wednesday afternoon, spreads were at 2.15 points, said Mr. Nanji.

As spreads have come in, largely in the wake of improvements in the U.S., Canadian investors have been clamoring for new offerings, reversing March's dynamic when buyers were scarce.

"There's been a complete reversal," said Steve Hawkins, chief executive of Horizons ETFs, a company that manages exchange-traded funds. "The street is screaming for credit."

This week, TD, the country's second-largest bank by assets, sold C$3 billion ($2.16 billion) of notes in the market, after receiving C$5 billion of orders. That offering was the largest single bond deal completed by a corporate or financial borrower in Canada, said TD's Mr. Becker.

The bonds, which pay interest of 3.105% until 2025 and then become floating rate notes until they mature in 2030, were priced at yields that were 2.55 percentage points higher than benchmark government of Canada bonds. In March, TD's offering would have been priced at yield spreads higher than 3 points, given market conditions, said TD bankers.

As things continue to improve, TD's Mr. Becker expects more borrowing after companies report earnings and as financing blackouts start to lift at the end of the month. An encouraging sign: even those in the stressed energy sector, where plunging oil prices are threatening the entire industry, have recently been able to attract bids.

Calgary-based Suncor Energy Inc., for example, closed the sale of C$1.25 billion of bonds on April 9. The offering came at a yield that was 4.20 points over government debt. Though relatively expensive, with a 5% interest rate, the fact that it got done at all said something about the market's growing risk appetite, said Mr. Becker.

--Paul Vieira in Ottawa contributed to this article.

Write to Vipal Monga at vipal.monga@wsj.com

 

(END) Dow Jones Newswires

April 16, 2020 09:13 ET (13:13 GMT)

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