Bond market: Canadian markets prepare for debt deluge after record issuance
The Canadian market is about to be flooded with some big bond deals, and investors have so far been snatching up the debt.
TC Energy Corp.’s liquids pipeline spinoff South Bow Corp. is preparing to sell $7.9 billion (US$5.8 billion) of debt in the coming months, a portion of which will be loonie-denominated. Trans Mountain Corp. is gearing up to borrow in the bond market to refinance some of its $25.3 billion outstanding debt. These deals follow the $7.15 billion debt offering from gas pipeline Coastal Gaslink in June, which was the largest loonie-denominated corporate bond issuance ever.
The Canadian debt market isn’t used to such large volumes. Last year, issuance stood at $102 billion, compared with US$1.5 trillion borrowed in the U.S. dollar corporate-bond market, according to data compiled by Bloomberg.
This year, Canadian corporates have been eager to borrow ahead of the U.S. elections in November, which could spur market volatility. Issuance is already at $88 billion, the fastest pace for the period, according to data compiled by Bloomberg going back to 2013.
All of that was taken by investors “without any apparent indigestion,” said Rob Brown, co-head of debt capital markets at RBC Capital Markets. Strong investor appetite has given issuers confidence that they can still bring large deals to the market without paying much higher premiums.
“Transactions have been characterized by healthy levels of oversubscription, broad distribution and solid performance in the secondary market, all factors that bode well for continued momentum,” Brown said.
That momentum is in part supported by a continued influx of money into the fixed-income market, said Sam Dorri, managing director at Canadian Pension Plan Investment Board. Funds will come from any number of asset classes, including private assets, he said.
Investors have been lured to Canadian markets by higher yields. The average yield on Canadian corporate bonds has stayed above 4.5 per cent for about two years, compared with the two-four per cent for most of the decade prior, according to a Bloomberg index.
The math works for borrowers, too. The extra yield investors demand to hold these bonds is hovering around 1.2 percentage points over Treasuries, compared to more than 1.4 percentage points a year ago and more than 1.6 percentage points two years ago.
The Bank of Canada has already snipped borrowing costs twice this year. Investors looking to get ahead of further rates cuts could stoke further demand for corporate bonds.
“A more modest pace of supply through July owing to earnings blackouts and the start of the summer slowdown should serve as a nice reprieve for the market and set us up well for the fall,” RBC’s Brown said.
With assistance from John Riggio
This article was first reported by BNN Bloomberg
