Leaping up the Maple table
Merrill's bank capital expertise has Canadian banks worried in the Maple market, says Matthew Attwood.
Merrill Lynch is the bank to watch in the non-core currency sector this year, following its ascent to number four in the bookrunner league table on the back of its activity in the Canadian dollar market.
The foreign property rule limiting Canadian pension funds' foreign holdings to 30% of their portfolios was removed last summer, and Merrill Lynch was one of the first banks to take notice when the move was announced the previous March.
The C$700m 10 year Royal Bank of Scotland trade announced that month by the bank was the first lower tier two capital deal in the Maple market. According to Amir Hoveyda, head of EMEA debt capital markets at Merrill Lynch in London, it was a sign of things to come.
"As you would expect in a developing market, the first wave of issuance came from SSA borrowers offering the best credit ratings," he says. "The market is maturing so we have seen and will continue to see a lengthening of the credit and capital curves."
"RBS followed this up with the first upper two tier deal, and we have seen other bank capital and senior benchmarks since, such as Hypo International's trade in May, the first single-A rated German bank to access this market."
Although no stranger to triple-A issuance, having led deals in Canadian dollars for ICO and KfW, Merrill Lynch has distinguished itself in the Maple market through its bank capital business.
An exception to this came in February this year, when the bank led a C$500m senior debt trade for Network Rail. The deal set a new benchmark by achieving the tightest ever pricing by a foreign issuer, going through the Province of Ontario.
Hoveyda counts this as one of the most important developments in the market yet, the point when a foreign issuer pierced the domestic gold standard.
"The trend will continue, and I expect Hypo to be followed by other credit-intensive names," he says. "The list of Merrill Lynch-led bonds demonstrates that the market is moving forward and we are confident we will soon see insurance and corporate hybrid and bank tier ones.
"Other non-core currencies, such as the Turkish lira, have witnessed a slump in issuance following the general pull-back of hedge funds and other investors from carry trades. The Maple market has seen no such movement because of its intrinsic raison d'être, a domestic investor audience worth C$1.2tr."
Susan Rimmer and Eric Giroux, co-heads of Canadian debt capital markets at Merrill Lynch in Toronto, predict an increase in foreign corporate issuance. This stands at 4% of the Maple market to date, a tiny proportion compared with domestic corporate supply, which accounts for a third of the internal market.
"The key thing for us is to provide best in class issuers for the Canadian investor base. We want to introduce borrowers who will stay in the market and not bring opportunistic one-off arbitrage-driven trades," says Giroux.
They say that Merrill Lynch has enough experience of other markets that have seen false starts to know that this one requires careful nurturing.
"We are the only global investment bank in Canada with a full domestic fixed income platform," says Rimmer. "We will use this position to bring more of the world's best borrowers to the Maple sector."
Key staff: Amir Hoveyda (head of EMEA debt capital markets, London)
Eric Giroux (co-head of Canadian debt capital markets, Toronto)
Susan Rimmer (co-head of Canadian debt capital markets, Toronto)
Key deals: RBS 4.25% 2015 C$700m (lower tier two); RBS 4.25% 2015 C$700m (upper tier two); Network Rail 4.40% 2016 C$500m; Hypo Real Estate Bank International 4.70% 2009 C$250m
League table positions (2001-05): 11, 10, 14, 16, 4