As an increase in crude oil prices has boosted confidence among energy companies, Canada’s junk bond market is on track for record issuance this year.
Source: The Globe and Mail
Canada’s junk bond market is on track for record issuance this year as an increase in crude oil prices has boosted confidence among local energy companies and investors.
New high-yield issuance in the Canadian dollar accelerated in recent weeks, taking the year-to-date total to $3-billion, a record for this time of year, according to data compiled by Bloomberg. National Bank Financial and BMO Capital Markets, which occupy the top two spots in a ranking of the deals’ arrangers in both volume and number of deals, are hopeful they can bring more transactions to the market in the coming months.
“There’s more comfort around the oil sector,” said Sean St. John, head of debt and equity capital markets at National Bank Financial Inc. “With oil over $50 per barrel, people have confidence that companies are here for the long run at these kind of levels, that they are sustainable and profitable.”
Among the most notable names that came to the market in recent weeks were CES Energy Solutions Corp., which revived a deal that originally didn’t pan out in March, and Gibson Energy Inc., which reopened its 2024 bonds. In a rare high-yield offering by a company outside the energy sector, Yellow Pages Ltd. sold $315 million of 5-year bonds to refinance debt due in over a year.
St. John said National is in talks with both energy and non-energy companies that are “actively watching and asking questions” about potential high-yield bond sales.
There could be even more to come in the coming years, according to Kevin Lockhart, the head of leveraged finance origination at BMO. He said it’s possible for the market to grow at a 20-per-cent to 25-per-cent pace in 2018 and 2019 as investors are now ready to absorb bigger-size bond sales.
“Deals beget deals and success begets success,” Lockhart said. “Right now we’ve got both energy-related and non-energy-related issuers looking at the market and debating. You never now for sure if they’re going to hit, but they’re asking us about the market environment and we have regular discussions as to whether the timing is right.”
He also said that the fact there’s more money available in the Canadian dollar debt market is helping change the traditional perception that it’s more expensive from the issuer’s perspective than the market south of the border.
Valuations do look favorable for issuers. Companies took advantage of spreads dropping to the tightest since at least the end of 2012 when Bloomberg started tracking the data with the Bloomberg CAD High Yield Corporate Bond Index. The premium investors demand to hold high yield bonds over Canada’s government bonds was at 375 basis points on Wednesday, up 15 basis points from a record low reached last week and compared with as much as 1,067 basis points at the peak of the oil crisis in February last year.
Similarly in the U.S. market, high-yield spreads are a few basis points away from a decade-low, according to a Bloomberg Barclays index. The premium for U.S. dollar high yield issuers was at 338 basis points on Wednesday, down from 839 basis points in February 2016.
“The global economic backdrop is helping as there seems to be a synchronized upswing in growth throughout the world, corporate profits remain robust and default rates are back near all time lows,” said Hanif Mamdani, head of alternative investments at Royal Bank of Canada’s RBC Global Asset Management. “This creates a very favorable backdrop for high-yield investors, offsetting some of the concerns around relatively tight spreads.”
Judging by how the Canadian corporate bond market is structured, there’s space for more high-yield issuance. The market has traditionally been dominated by investment-grade issuance with most high-yield issuers taking to the bigger and more liquid U.S. market. The high-yield market accounts for around 3 per cent of the overall corporate bond market in Canada, compared to about 11 per cent for the U.S., according to Bloomberg data.
What’s more, the appeal of the U.S. market for Canadian companies might have taken a dip after investors south of the border dumped Canadian energy companies amid a slump in oil prices in 2014. It was Canadian investors that came to the rescue picking up these bonds in the secondary market, according to National’s St. John, and the latest activity in the primary market in the Canadian dollar is a reward for that trust.
“What’s happened in the oil patch in the last couple of years showed that the U.S. market is not the go-to spot for Canadian companies, because when there is trouble, the U.S. market aggressively abandons them,” he said. “The people that supported those names in tough times are here supporting them re-issuing in the Canadian market now.”