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Public sector borrowers happy to play home or away

The focus of Canada’s public sector issuers over the last few years has been diversification, in all its guises. Borrowers have been tapping into distant international markets, attracting foreign accounts into the Canadian dollar sector and exploiting the low rate environment to issue FRNs. Nina Flitman reports.

  • 28 Sep 2011
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The Canada Mortgage and Housing Corporation (CMHC) celebrated the 10th anniversary of its Canada Mortgage Bonds (CMB) in June with a blowout deal in its domestic market. The C$6bn five year benchmark, led by CIBC, National Bank Financial, Royal Bank of Canada and TD Securities, was 1.4 times oversubscribed.

While 74.5% of the transaction went to domestic Canadian accounts, international investors also flocked to the deal, with 19% of the paper going to the US, 7.5% to Europe and 9% to Asia. The level of global demand for the CMB, and Canadian bonds generally, is testament to the strength of the Canadian economy as market volatility rages elsewhere. The combination of liquid transactions in a stable market has proved to be attractive to many investors, and accounts from around the world have been participating in Canadian dollar deals, supporting the local market.

"We have seen, over the last two months, significant international demand for large provincial issues like those of Ontario and Quebec," says Jason Stewart, managing director, debt capital markets, at National Bank Financial in Toronto. "That has enabled issuance, whereas if borrowers were relying purely on the domestic side, it would have been less favourable both in terms of cost and size."

The influx of new, foreign investors to the market has been there for all to see, with central banks especially looking to the commodity-rich refuges in Canada and Australia to diversify their official reserves and to lessen exposure to the euro and the US dollar. Dealers from across the market report that there is growing interest in the Canadian domestic market from Asian central banks in particular.

"Central banks’ participation in our programme has increased from about 3%-5% to more like 10% this year," says Mark Chamie, treasurer at CMHC in Ottowa. "There has also been a marked increase in demand from financial institutions for high quality liquid assets."

But while these central banks cannot simply turn to Canada as a haven as economic turmoil ravages other regions — there are just not enough outstanding bonds to satisfy a whole-scale move from US treasuries, for example — it is also difficult to switch them on to other Canadian issuers.

"A typical central bank is bombarded with opportunities to invest in various jurisdictions," says Andrew Hainsworth, managing director, debt capital markets, at BMO in Toronto. "While they are very comfortable with Canada bonds, when they start looking at CMBs, or provinces, or even banks, there is another layer of name approval and credit work and this can take time — it’s an evolving process."

But buoyed partly by the influx of international investors and central banks, domestic issuance has dominated the public sector’s funding plans over the last year, with the provinces’ foreign currency issuance falling 10% year on year. CMHC and other public sector borrowers have been able to tick off much of their funding requirements in the domestic market, partly attracted by the longer maturities that are on offer. While in the US dollar market, the sweet spot remains in the three to seven year part of the curve, in Canada investors are happy to take deals up to 30 years — the majority of paper issued up to July in 2011 was 10 years or longer.

Since 2004, Canadian dollar domestic debt issuance for the sovereign, the crowns and provinces has grown from C$89.3bn to C$183.6bn in 2010. In the first seven months of 2011, issuance stood at C$191.2bn.

"The domestic market really is the mainstay of the public borrowers’ programmes," says Grant Berry, managing director, debt capital markets government finance at RBC Capital Markets in Toronto. "It provides the most funding in terms of Canadian dollars, and it also gives a wider range of maturities and in some cases different sorts of instruments, such as return bonds and FRNs."

Floating away

The floating rate note has offered Canadian public sector issuers an opportunity to diversify their funding within the domestic market. With Canadian interest rates at record lows of 1% and expected to stay that way until at least mid-2012, investors have been rushing to market and the product has proved to be sustainable. One FRN from CMHC issued in 2011 was more than three times oversubscribed in syndication.

"We’ve been pleasantly surprised by the consistent amount of demand for floating rate notes over the last few years," says CMHC’s Chamie. "It’s my expectation that we will continue to see the demand for FRNs, at least in the near term."

Ontario issued C$2bn of FRNs in the month of May alone, while CMHC’s bulging FRN programme has supplied investors hungry for triple-A Canadian dollar assets. And the success of the notes has fed on itself: as more investors have bought the product, the size of the deals has increased and that in turn has attracted more accounts to look at the market. Bank treasuries especially have been big investors in FRNs over the last year, which has reassured dealers that the market can survive any future moves in interest rates.

"Floating rate notes are generally viewed as being defensive in nature," says Doug Bartlett, managing director, head of government finance and infrastructure at CIBC in Toronto. "As a result investors found them to be very attractive earlier this year given the expectations for Bank of Canada rate hikes and rising bond yields.”

Mark Chamie agrees that, for the most part, the FRN is a sustainable product for Canadian public sector borrowers even as rates change.

"There will certainly be some FRN buyers who are purchasing interest rate sensitive and who are playing that market based on their views of interest rates," he says. "There are others who are purchasing it based on relative value to other fixed rate issues, while there are also money market type investors who come in to this market looking for an alternative product for their funds. I think we have a good mix of all those types of investors, so we don’t expect significant swings in the demand for FRNs."

Foreign flings

While the Canadian domestic market has supported an increase in both fixed and floating rate deals for public sector borrowers, these issuers have also turned to a wider range of international markets over 2011. Borrowers have looked for the arbitrage opportunities in issuing offshore, while also diversifying their investor bases by tapping into accounts that do not necessarily carry Canadian dollar lines. Power provider Hydro-Quebec undertook a successful foray in the international markets in July, when it placed its first US dollar deal in a decade. The five year global transaction was priced at 22bp over mid-swaps, flat to the borrower’s guarantor Province of Québec, as demand for the rare name swamped lead managers Bank of America Merrill Lynch, HSBC, National Bank Financial and RBC Capital Markets. The strong Canadian dollar meant that pricing in the US market was flat to the borrower’s domestic curve.

Some 65 banks participated in the bond, of which 78% were from the US, 15% from Europe and the remainder from Canada.

"The breadth and depth of demand in Hydro-Quebec’s US dollar deal was impressive," says Stewart. "To be able to do a transaction of that size returning to the market after 10 years was a testimony not only to the borrower’s credit quality, but also to its strategy of investor relations."

Around 60 investors also participated in a $500m deal for New Brunswick in June, as the province priced its first benchmark in the US since February 2007. Bank of America Merrill Lynch, CIBC and RBC Capital Markets were lead managers on the deal, which was priced at the tight end of guidance at 35bp over mid-swaps.

But other borrowers have ventured even further away from home. In June, the Province of Ontario returned to the Australian dollar market to increase its outstanding 2020 Kangaroo bond, while the Province of Québec followed in July with its first Australian dollar deal since 2006. Québec’s A$225m 10 year deal was only the borrower’s second bond in the Australian market, and the rarity value brought a wide range of investors into a book dominated by central banks and asset managers from Asia.

While successful transactions such as these illustrate the potential for diversification for Canadian borrowers, market participants emphasise that such deals will never be a mainstay for the bulk of their funding requirements.

"The Australian dollar is a very international currency, and there is a very international market because there aren’t many home domiciled issuers," says Berry. "But it will be a small part of what the Canadian provinces will be doing, because Aussie investors are more focused on triple-A credits and you can only ever do a little part of your C$30bn or C$40bn programme there."

Instead, public sector borrowers will continue to focus on attracting international accounts to participate in the Canadian dollar transactions and concentrate the bulk of their financing in their domestic market. Dealers are certainly expecting that the final few months of 2011 will continue to see brisk issuance.

At the beginning of September CMHC was on track to issue between C$40bn and C$45bn over its fiscal year (ending March 31), while the Canadian provincial borrowers are also well on their way to fulfilling their targets. British Colombia, Ontario and Québec — the three largest provincial borrowers that account for 75% of total forecast provincial borrowing — had completed 38%, 47% and 53% of their funding requirements respectively by early September. British Colombia has another C$5.7bn to raise, Ontario C$18.65bn and Québec C$6.496bn, and market participants are optimistic that these borrowers will continue to enjoy open access to the markets even if volatility continues in the US and the eurozone.

Canadian public sector borrowers have marched through the volatility of the last few months virtually unscathed — CMHC accessed the bond markets only a week after Standard & Poor’s downgraded the US — and it is expected that they will be resilient enough to face whatever problems the markets can throw at them over the coming few months.

"During August there wasn’t a single European corporate issue, but Canada continued to have quite a steady pace of provincial transactions in the domestic market and very successful CMB issuance," says Stewart. "That’s a function of credit quality, but it’s also about these borrowers being able to effectively time their issuance."

  • 28 Sep 2011

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 20 Oct 2014
1 JPMorgan 274,362.92 1088 8.09%
2 Barclays 246,500.00 850 7.26%
3 Citi 241,124.13 935 7.11%
4 Deutsche Bank 240,786.09 977 7.10%
5 Bank of America Merrill Lynch 235,519.40 841 6.94%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 21 Oct 2014
1 BNP Paribas 45,034.29 183 7.39%
2 Citi 34,532.35 96 5.67%
3 Deutsche Bank 34,196.96 122 5.61%
4 Credit Agricole CIB 30,654.20 126 5.03%
5 Barclays 28,791.02 107 4.72%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 21 Oct 2014
1 JPMorgan 23,663.67 112 9.36%
2 Goldman Sachs 22,917.78 77 9.07%
3 Deutsche Bank 20,595.54 76 8.15%
4 UBS 19,458.10 79 7.70%
5 Bank of America Merrill Lynch 18,899.80 68 7.48%