Canada’s borrowers survey the market’s tough scene
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Canada’s borrowers survey the market’s tough scene

Canada’s reputation as a top notch sovereign issuer may have taken a hit thanks to plunging commodity prices — with the problem particularly acute for oil producing provinces such as Alberta, which face rapidly rising borrowing needs. And the commodity concern comes as worries over a Canadian housing bubble linger on. But with its total net debt-to-GDP among the lowest of G7 countries and some of its smallest provinces able to bring strong bond deals to the international markets, the Canadian story is still a strong one.


Participants in the roundtable were:

David Ayre, assistant treasurer, Canada Mortgage and Housing Corporation

Alain Bélanger, managing director, financing and debt

management, Province of Quebec

Paul Belanger, managing director, government finance DCM, RBC Capital Markets

Grant Berry, managing director, government finance DCM, RBC Capital Markets

Mark Chandler, managing director, head of Canadian fixed income and currency research, RBC Capital Markets

Lowell Epp, assistant deputy minister, treasury and risk management, Province of Alberta

Susan Love, vice president and treasurer, Export Development Canada

Mike Manning, executive director, capital markets, Ontario Financing Authority

Jigme Shingsar, managing director, US debt capital markets, RBC Capital Markets

Garry Steski, assistant deputy minister, treasury division, director of capital markets, Province of Manitoba

James Wu, chief, debt management, Department of Finance

Craig McGlashan, moderator, GlobalCapital

At home, the innovation of carve-out programmes is providing a new funding tool for issuers in the domestic market, but some issuers were shut out during the summer — requiring them to bide their time for bringing deals.Canada is also not immune to some of the forces hitting the wider market — from negative dollar swap spreads, to dwindling liquidity and concerns over the outlook for global growth.

GlobalCapital brought together some of Canada’s leading issuers and debt capital market bankers in late November to discuss these and more.

Global Capital: How has the economy of the Canadian sovereign and that of its provinces fared in 2015?

Mark Chandler, RBC CM: It’s been a challenge for Canada. We estimate growth for 2015 will be about half a percentage point below potential at 1.2%. We have three provinces that look like they’ll experience negative real GDP growth. The obvious culprit has been the decline in energy prices affecting both the energy producing provinces and the non-producing ones. 

Another disappointment has been that non-energy exports and sectors have also disappointed compared to what you would have expected given a fairly robust US economy and the weakness of the Canadian dollar. That remains an open question for 2016 — if we can get enough strength from the non-energy sector to offset energy weakness.

Mike Manning, Ontario: In Ontario we use a private sector consensus forecast adjusted for prudence which gives us 1.9% growth in 2015 and 2.2% for 2016. Economic activity got off to a bit of a slow start in 2015 given some of the events in the US, with the colder weather and ports in the west coast closed because of strikes. 

We have seen a pick-up — the first quarter was flat and the second quarter was 0.4%. Indicators so far in 2015 have been fairly positive. Auto sales are up 5.7%, retail trade 4.5%, home re-sales 9.4% and international exports up 9.7%.

Garry Steski, Manitoba: We’re expecting 2.1% growth in 2015 and 2.3% in 2016. Growth of around 2% has been pretty much our story over the last several years. Our unemployment rate remains one of the lowest in Canada and our population growth is continuing, so it’s status quo for us from an economic standpoint.

Alain Bélanger, Quebec: At the time of the last March budget, the forecast for economic growth in 2015 was 2%, right in line with the private sector forecast. Our government has revised this down to 1.5%, which is also what the private sector now forecast for Quebec. 

Employment is right in line with the forecast at the start of the year. The economy is doing OK, but is not as robust as we expected. We were expecting much more growth from the US and that the price of gasoline would be much lower. That’s just not been the case. The price of oil dropped a lot but gasoline didn’t drop as much.

We expected to have a much stronger external sector. In 2014, international exports increased by more than 10%, now we are close to 7%. The economy is doing OK but growth is not spectacular.

Lowell Epp, Alberta: Clearly Alberta’s been hurt. We’re one of those that are going to underperform. We’re expecting GDP in 2015 to drop by 0.9% and rise by 1% in 2016. But that was based on our budget’s oil price forecast, which is already a little dated. Give it another week and it might look very good — you never know. 

We’ve had a lot of job losses in Alberta. We’ve certainly seen the effects of $40-$50 oil prices, but we do have a strong economic base. The investment in the oil sands that’s been made over the last 10-15 years is going to keep paying off. Oil production will keep going up from the oil sands because of those investments.

Global Capital:Have international investors responded to the change in Canada’s federal government? Are there any concerns about the plans to run larger budget deficits?

James Wu, Department of Finance: Canada has a well earned reputation for being a responsible fiscal, economic and financial sector manager. The major credit rating agencies have again accorded Canada the highest possible credit rating with a stable outlook. This is a position shared by very few sovereigns and has supported healthy demand for Canadian government securities.

Canada’s total net debt-to-GDP remains among the lowest of G7 countries — just under 40%, compared to 80% for the US. Factoring in public sector pension liabilities and funding, Canada’s relative position is actually even more advantageous. This is a situation shared by many of the provinces. International investors and rating agencies recognise these factors, which provide Canada scope to potentially increase borrowings from markets without unduly impacting our financing costs.

Chandler, RBC CM: There’s still a desire for Canadian government product. If you look at aggregate foreign purchases of Canadian issuers, volumes are still running at an annualised rate of about C$60bn, so it’s quite substantial. Even if you look at the central banks’ foreign exchange holdings, those that report the currency breakdown still have quite a steady inflow into the Canadian dollar. That diversification story is still intact for the central banks, and once again the aggregate foreign purchases show a steady pace.

Chandler, RBC CM: The projected deficit for the new federal government, at 0.5% of GDP, is not a worrisome amount for investors.

Wu, Department of Finance: Last week’s economic and fiscal update reiterated the government’s commitment to a balanced budget in 2019-2020, while maintaining a declining debt-to-GDP ratio throughout.

The new fiscal measures the government has in mind were not incorporated in the economic and fiscal update. They will be part of the 2016 federal budget. Any changes in the financial requirements will be reflected in the size of the government’s borrowing programme, and supported by strong demand for Government of Canada securities and the market’s capacity to absorb additional issuance.

Global Capital:: We’ve touched on commodity prices a lot but has anyone else noticed any effect on investor sentiment from that area?


Susan Love, EDC: We do all of our borrowing internationally because we’re primarily a US-dollar based borrower. Over the last couple of years we’ve had more questions on Canada’s housing sector and commodity prices. More recently, the focus has been on our new government. That said, investors are still very positive on Canada. They view Canada as having a strong economy that operates in a very fiscally responsible manner. 

Paul Belanger, RBC CM: Investors looking at Canada and the provinces are wondering how the commodity story will play out, and that is causing a little bit of caution. The housing market used to be the big issue, but it’s taken a back seat to the commodity story. 

Province by province there’s a commodity question as well — it’s different for each one, as Mark alluded to. With growth rates it’s a tale of two economies. There are some provinces doing well and others not so — we’ve had some questions about that.

David Ayre, CMHC: When speaking to investors about Canada Mortgage Bonds we get lots of questions and oil is a big theme we hear a lot from our investor base lately. However, through 2015 to the end of September — when we did our last five year fixed rate deal — about a third of our bonds went to international investors, which is similar to last year. Although there’s certainly an increase in the number of questions related to oil and the broader economy, it doesn’t seem to be deterring investors from buying our bonds.

Global Capital: Alberta is obviously going to be one of the provinces hardest hit from the commodity price falls and your borrowing programme is set to grow sharply over the next few years. How will this affect your strategy? 

Epp, Alberta: We’ve really changed our focus. Our international borrowing was entirely opportunistic — where we could find opportunities to save money we would. But it needs to become much more a core part of our programme. Between 20%-30% of our total issuance will be targeted to be done outside Canada. That’s probably the biggest change. Within domestic markets we’re giving more focus to building benchmarks, getting greater liquidity and building a bigger presence in investor relations.


Belanger, RBC CM: You are certainly right to be cautious about how you’re going to tackle the larger funding programme. The message you’ve delivered around focusing on benchmarks has been very well received and it resonates with investors, especially in this environment where liquidity is key.

Global Capital: It must have been fairly tough over the last few months, with the euro market difficult, arguably because of quantitative easing, and extremely tight swap spreads in dollars. That must make timing in the international markets very important?

Epp, Alberta: It’s always going to be that way — the arbitrage and the pricing comes and goes. We were fortunate to get a large US dollar deal done in 2015 and we’ve done some euro MTNs, but there have certainly been challenges. The change in government and late budget meant we had to pull ourselves out of the international and domestic markets for longer than we would have liked. 

Global Capital: It must have been reassuring to see Manitoba’s very strong US dollar benchmark in November. Garry, could you tell us a bit about that?

Steski, Manitoba: We were very pleased with it. We had a couple of goals we wanted to achieve and we’d been monitoring the market since our last US dollar global in April 2014. This was the first opportunity we had to come back into the US dollar market and swap back into Canadian dollars at a favourable cost and get a good size. We have historically done smaller sized deals but one of the things we’d heard from investors was that if we could print $1bn it would help drive participation.

Grant Berry, RBC CM: Looking at the domestic Canadian market, the most important aspect in 2015 was access. There’s a lot of talk about spread, but how about actually getting money? If you go back to June and July, all of a sudden things stopped. CMHC still funded through then but everything else stopped. There were two groups — the large issuers and the others that were still high quality but had a harder time getting any money.

Belanger, RBC CM: The smaller issuers had to be more patient. In this environment, it seems like Ontario and Quebec, and maybe to a lesser extent British Columbia, are able to get money most of the time — maybe not every day, but the market’s certainly open. We need stronger tone for some of the smaller issuers to be able to access the market. When issuers talk about upcoming borrower needs we say, ‘Don’t pick next Tuesday, you may have to give more runway to find an opportunity.’

Manning, Ontario: We had spreads widening as well. From early summer until October it was just all one direction and sometimes it gapped. That makes it very difficult for investors to figure out what to do. The access to demand was very patchy over that period compared to normal.

Belanger, RBC CM: It all ties back to using the international markets more strategically, as Ontario and Quebec do. Manitoba’s deal was perfect in that it demonstrates to the market that you can get a lot of funding elsewhere. That’s only positive for the domestic market dynamics.

Jigme Shingsar, RBC CM: All that being said about less certain domestic markets, we will still have very little provincial supply outside Canada. It highlights the amount of liquidity the domestic market still provides, whether it’s about cost effectiveness or access. 

There were only three dollar benchmarks from the provinces in 2015, which is quite low, and shows you offshore markets are about strategic diversification as opposed to lack of options. That speaks to the quality of the domestic markets, despite the volatility.

Berry, RBC CM: We haven’t seen this for a long time. You can do some extra issuance outside Canada but it’s not going to get you to the right spot. Do you do less, or more, or on different terms?

With Manitoba’s deal, even if you’d wanted to do a longer dated trade you needed to do five years because you knew that was where you could get a bigger deal done. Issuers need to be flexible.

It’s been difficult for investors too — they don’t know what the next move is. Rates and spreads have been all over the place, so they have to think if this is the right time.


Manning, Ontario: For the provinces, it’s been a question of balancing patience versus taking all the opportunities that come along. It’s that type of market, because we found there are periods where for a couple of weeks it’s not possible to do a bond issue. Then all of sudden it’ll open up and you can do a jumbo sized deal.

Chandler, RBC CM: The problems we had with spread widening in the summer were not endemic to Canada alone. I spent two weeks in Europe talking to a number of investors recently, including central banks, real money accounts and hedge funds. The problems we faced were seen in as much force or more in other markets.

It was a big deal for us, but the investor side also saw a lot of changes over that period — a lot of changes in liquidity and spread movement and we don’t think interest in Canadian government debt suffered on a relative basis.

Berry, RBC CM: That goes back to investor relations. We all do a fair bit in this regard, Alberta most recently. We’ve seen better quality on this front because you have to go out and sell your story to investors, and compete with the other issuers. It’s gone a long way. Everyone here on the issuance side is out telling their story. 

Sometimes in the public sector no one wants to spend any money, but investor relations is an investment. Most of you have done a very good job but you need to keep doing it.

Love, EDC: We really want to leverage technology to reach investors. A couple of weeks ago we did our first net roadshow to provide an update on our green bond programme. You pre-record a presentation with a voiceover. With the help of a select group of underwriters, investors are invited to listen to the presentation. This allowed us to reach out to a group of 25 investors over a very short period of time. It was very inexpensive to do and could be accessed by a broad number of people.

You definitely can’t replace the face-to-face meeting, but as an initial introduction or for a programme update there are a lot of ways to use technology to get in front of a large number of investors. That’s fantastic, especially given everybody is cost conscious. I think investors really appreciate how convenient it is for them. For example, they might be sitting at their desk having lunch, they can switch on the net roadshow for 10 minutes and they don’t have to go anywhere or spend any money. 

It was a perfect fit with our green bond programme. But the response has been great so we’re looking to see how we can use technology in a number of other areas.

Global Capital: Are other issuers planning net roadshows?

Ayre, CMHC: We’re definitely contemplating it. 

Manning, Ontario: We did one for our last green bond and we’ll probably do it for our next green bond as well. We’re working on that bond, it’s just taking a bit more time than we planned. We’re hoping to do it in early 2016.

Global Capital: Susan, was your net roadshow a non-deal roadshow?

Love, EDC: Correct. We issued our first green bond in January 2014. In September, we completed an audit with Ernst & Young where they looked at the use of proceeds on our first green bond and how we allocated those to the relevant assets. As a conservative organisation, we felt taking that extra initiative was important — the audit reviewed how we took the proceeds, applied them to green assets and then tracked those assets through the life of the bond. Since the audit was completed, we’ve been monitoring the market. We were pleased to be able to issue our green bond this year as we have expressed our commitment to be a regular issuers.


Global Capital: Are green bonds on many domestic Canadian investors’ radars?

Belanger, RBC CM: Some investors are looking at it. Ontario’s inaugural deal was well oversubscribed and the majority of investors demonstrated some shade of green. But it’s been slower to develop in Canada. Ontario’s deal was in global format so it could be sold to international investors. 

There is increased interest from some Canadian investor types, for example public sector funds or asset managers. Also, some foreign investors who are interested in Canadian dollars, for instance in the insurance sector, would be very interested to see more Canadian dollar green bonds become available. 

Global Capital: Commodity prices have maybe overtaken the housing market as the main concern about Canada for international investors. But how is the housing market performing?

Ayre, CMHC: We’ve all seen the dramatic headlines about housing bubbles in Canada, this is not new and has been going on for a number of years. International investors pick up on these headlines and it’s probably the most common question we get.

What we find helps is if we walk the investors through some of the facts. We are the biggest mortgage insurance provider in Canada, so we have a very good insight into what the broader fundamentals in the mortgage market look like. In the last two years we’ve started to publish a lot more information on our insurance in-force and the broader housing market which is all available on our website. 

The area we find is typically the best at calming investors’ concerns is arrears rates. The arrears rate on our book is 0.34% — it’s extremely low and defaults are obviously considerably lower than that. 

We generally find that when you get some of the facts out there, it tends to help dispel some of the headline news. In addition to low arrears rates, a typical homeowner in our book has nearly 50% home equity, so there’s a good cushion there. Also, the government is not involved in insuring properties over $1m — because again, that’s another one that tends to get headlines while amortisations are a maximum of 25 years. 

We still see good, sound economic fundamentals when you look at Canada as a whole. That obviously helps the housing market. 

Chandler, RBC CM: I get a lot of questions about the vulnerability of the Canadian housing market when I go abroad. I’d note that in terms of household debt to disposable income, the situation Canada faces is also faced by a number of other countries. It’s much more egregious, for example, in Australia. And, it’s not quite at the pre-recession peaks seen in the UK or the US, for example. People also forget that asset prices are rising along with liabilities. If you look at liabilities to net worth, it still looks manageable. 

Before the crisis, we had five periods domestically when housing prices declined in real terms. But each one of those was preceded by quite an aggressive rate hiking cycle, with policy rates rising a minimum of 125bp and, on average, closer to 300bp. That’s just not in the cards if we’re looking at a near term outlook for Canada. 


Global Capital: Are central banks increasing their buying of Canadian dollar assets?

Berry, RBC CM: There’s been waves going back at least 10 years. We’ve seen entities that have been around for a while that scale back and then come back again. You go back to the 1980s and some of the numbers were huge from Japan and Europe. And so looking in the area of Asia, there certainly has been a move there. 

Every investor has their own strategies of what they want to use as an asset. And clearly the world has become very small. 

Some of these central banks take a long, long time — years — to come in. And some just need one meeting or two meetings to get comfortable. But you can’t put all your eggs in one basket and just use one investor class to satisfy your needs. They might go away just like that at the same time. 

Bélanger, Quebec: When we issue bonds in Canada it’s hard to know exactly when there are central bank buyers or not. It’s obvious some central banks started buying us a long time ago. I don’t have the feeling that they shy away from the Canadian market. As long as they have to hold Canadian dollars in their foreign reserves they will buy. 

But sometimes they need money. And, unfortunately, the first asset you sell is the highest quality asset in your portfolio. And guess what? Canadian names will be the first on the list. That’s why I’m not so surprised that from time to time I’ve heard they’ve sold us, Ontario or whoever. If you need money tomorrow, a covered bond is not necessarily going to be your first choice to sell. 

We still meet central banks on a regular basis. Regardless of what’s going on in Canada, it has the best rating in the world. I’m not afraid about central banks because they work very carefully. Normally central banks buy and hold, and when they sell, they do it very carefully.

Wu, Department of Finance: There has been some ebb and flows from foreign central banks. In our view, some of the recent selling actually helps improve liquidity for Canadian securities. 

Looking back further, interest among foreign central banks increased a lot for Canadian securities following the financial crisis. The IMF’s COFER data, which started to separately report Canadian dollars in 2013, shows that interest grew significantly and continues to be there. However, the trend started well before 2013. Also, the fact Canadian dollars started being reported separately in the IMF COFER data of course further helps to increase and support demand for Canadian dollars. 

According to our statistics, foreign holdings of Canadian securities levelled off at about 30% in late 2012; double the pre-crisis level. There may still be some ebb and flows, but in terms of total holdings we feel it’s fairly stable. To the extent that Canadian dollars are viewed as a high quality reserve currency, then, there will continue to be demand among foreign central banks. 

Shingsar, RBC CM: My experience is that central banks are still adding Canadian and Australian dollar assets. The rate of growth of purchases can ebb and flow, but those two currencies have a place in a reserve currency portfolio. That seems to be accepted. 

So you’ll continue to see new central bank entrants. So that’s adding more demand, regardless of some of the near term ups and downs for the Canadian story.

Global Capital: Alain, you mentioned you were more concerned about some of the big international players than central banks. Could you go into a bit more detail? 

Bélanger, Quebec: Some big international investors may just have a big play in foreign currency and move from Canadian dollars to another currency very quickly. Whereas a central bank, when it sells, will behave more carefully and won’t make a big splash on the market. 


Global Capital: Speaking of making a big splash when selling, secondary liquidity has been a worry for SSAs worldwide, with regulation among the factors blamed. Have Canadian issuers found this to be a problem? 

Love, EDC: We primarily issue internationally in US dollars, but we have seen an impact. 

In terms of our long term programme, where central banks have traditionally been our buy-and-hold investors, there has been increased participation from bank balance sheets that have the requirement to hold our paper for their liquidity portfolios. There’s definitely less secondary trading in our benchmark bonds because not only are the central banks holding our paper but the bank balance sheets are holding it too. 

In the short term market, the money market reforms and the Volcker rule have put a lot more restrictions on what our traditional investors can buy. This has put increased pressure on our ability to raise commercial paper.

There’s been a reduction in the amount of proprietary trading too. As a result, when you want to sell things quickly in the secondary market, it can be more of a challenge. 

Manning, Ontario: We benefit from having pretty liquid bonds and a pretty liquid yield curve. Most of the new regulations increase dealer credit charges. To the extent that there is less balance sheet available to provide secondary market liquidity, we’re somewhat concerned. 

I was talking to some investors last week and they indicated that Canada is still one of the most liquid bond markets around the world. But they did say that liquidity is not as good as a couple years ago. Liquidity is tapering off. 

Wu, Department of Finance: There’s a bit of tightness in our markets and a little bit less liquidity, mostly in off-the-run Government of Canada bonds. 

The liquidity issue is pervasive pretty much everywhere. For example, US agencies have been studying this for some time and this summer the Fed’s monetary policy report indicated it was having a tough time trying to narrow down what the problems were. 

Canada has avoided any major liquidity induced movements in our yield curve, unlike other sovereigns. For example, there were the dramatic movements in yield curves in the US in October 2014 and the German 10 year Bund in May 2015. 

We do monitor potential liquidity issues. One suggestion that came up when consulting with investors and market participants in 2014 was to cease issuance in the three year sector in order to promote liquidity in the core two and five year sectors, which we implemented this year. 

There have been other steps to support liquidity. For example, the Bank of Canada acquires our securities at auctions to offset its bills in circulation and other liabilities. Its participation in our auctions rose to roughly 20% in recent years. To support liquidity in the market, the Bank of Canada has decided to reduce its participation in our auctions effective this October, reducing it to 15% and possibly considering going down to 10% next year. 

When discussing liquidity, I also hear a lot about two regulatory issues. One is the tighter leverage limits, reducing access to balance sheet, so dealers are not able to engage in as much market making activity. They’re moving away from being a principal in the transactions and acting more as an agent to match buyers and sellers. Also, a lot of banks and other entities with liquidity requirements are interested in buying the highest quality liquid assets available, which increases the demand to acquire Government of Canada debt. 

Global Capital: Has Canadian regulators’ approach to implementing Basel III differed to other countries?

Wu, Department of Finance: The Office of the Superintendent of Financial Institutions’ (OSFI) implementation of the Basel rules generally line up with other countries. But the required adjustment for Canadian banks seems to be more manageable than for large banks in other jurisdictions. 

One reason for this is that OSFI already had a very sound banking regulatory system and the Basel leverage ratio winds up fairly close with the old asset-to-capital multiple that OSFI used. So, less of an adjustment will be needed for Canadian banks. 

Bélanger, Quebec: For liquidity, we increased the size of our benchmarks. For instance, we increased our last 30 year benchmark up to C$10bn, which is quite substantial for us. That’s why we feel liquidity for us is still good. But obviously all the off-the-run and old private deals suffer. 

Global Capital: What other currencies have issuers being taking advantage of and do you think could provide opportunities in 2016?

Love, EDC: We issued in renminbi, Australian dollars, New Zealand dollars, British pounds, euros and Chilean pesos in 2015. We still see opportunities to issue in those currencies in 2016. 

We’re very supportive of developing the renminbi market. With the devaluation of the currency a few months ago, naturally there’s a little bit of apprehension from investors. There probably will be for a little while, until they see things stabilise. I’m very optimistic that we’ll be able to issue again in that currency and that the market will continue to grow. It’s natural with a developing market for things like this to happen from time to time. 

We’ve made a long term commitment to the Kangaroo and Kauri markets and we expect there will be opportunities to issue in those markets again in 2016. 

Manning, Ontario: We’re looking at a lot of different markets. The Kangaroo market’s been good for us. We’ve done a little bit less this fiscal year — about A$140m, while last year was A$475m — but it’s still important for us. 

Renminbi is a market we’re watching. It tends to be somewhat more expensive for us. It doesn’t have a fully developed swap curve but we’re fairly confident we will access that market at some time in the future. 


Steski, Manitoba: We’ve done a couple of Australian dollar deals this year. But that type of funding has to be cost effective relative to our domestic cost of funds. As long as that’s still there in 2016, we’ll continue to issue. 

Epp, Alberta: We’re planning to get into the Australian dollar market. The programme’s not quite ready but will be soon, hopefully in early 2016. Outside the euro and US dollar, it’s largely opportunistic. We’ll certainly take a look at it. But we haven’t been shown anything that’s been particularly attractive. If it makes sense, we will go there. 

Bélanger, Quebec: We recently issued a A$750m Kangaroo bond, in several tranches. That market has been very good for us lately. With renminbi, we’re similar to Ontario. We monitor it, but it’s very expensive to bring that back to Canadian dollars. It’s very short dated as well — two to three years. 

Love, EDC: The advantage EDC has is that we have natural needs in some of these currencies. We’re also mainly swapping back into US dollars, rather than Canadian dollars. For instance, we’ve issued in euros and have a natural asset base there, so we aren’t necessarily relying on the swap market. 

Wu, Department of Finance: We’re in a similar camp. We issue to acquire foreign reserves and our holdings are principally in US dollars — along with euros, sterling, and yen. That’s pretty much it. 


Sterling, for example, was added after assessing our holdings and determining that greater diversification would be beneficial. But besides the recent sterling decision, we don’t see any other potential changes. 

Global Capital: Speaking of euros, benchmarks in that currency from Canadian issuers in the second half of 2015 were a bit smaller than in the past. Is that a result of eurozone QE distorting secondary markets and making primary issuance more difficult?

Bélanger, Quebec: Firstly, 2015 has been the second best year for Canadian provinces in euros. British Columbia, Ontario and ourselves raised a total of €4.25bn. To find a better year you have to go back to 2009, when Ontario and ourselves raised almost €5bn. 

In January 2015 we sold a €1.75bn bond and then in October a €750m deal. Autumn is a reflection of what we mentioned before — the market is very patchy. Sometimes demand is huge. In January we didn’t expect to get the size we did. It was unbelievable. 

Our last deal, for €750m, was a good deal in terms of the number of investors — more than 40. The quality of the book was very good. It was a smaller bond issue but just as strong as what we’d sold before. Not being on the European Central Bank’s buying list may have played a role.

But I don’t feel the sentiment for Canadian provinces has changed. If that is the case, we will see it in 2016. But the book for the last deal had the investors we are used to seeing. 

These are changing markets. Some weeks it was extremely difficult to do something, and all of a sudden we could do a lot of deals. It happened that in October it was difficult in Europe. Maybe the way to do a deal in Europe will be to do a smaller deal, then tap it like we do in Canada. 

Belanger, RBC CM: British Columbia’s inaugural euro benchmark in the autumn was €500m in size, which is at the smaller end of the scale as compared to some of the €1bn plus deals from Ontario and Quebec. But BC tends to use international markets more for arbitrage rather than strategically, so they were focused on price more so than size. 

Global Capital: Staying with euros, Lowell — you mentioned that you’d sold some long dated euro MTNs. Are you still seeing demand for that instrument?

Epp, Alberta: We saw a couple of attractive opportunities for clips of around €50m and took them. But we haven’t seen much more. We’ve be very happy to do more — they offer good pricing and at a 25 year tenor where we don’t have a lot of maturities, so it fits in very nicely for us.

Steski, Manitoba: We had a very similar experience — it was all reverse enquiry driven. Our first was a 20 year and the last three have all been 25 years. Our last one was our largest, at €97m. They seemed to grow incrementally with each one we’ve done. Maybe we can get over €100m with the next one. As long as it swaps back into Canadian dollars at a cost effective level we’ll keep doing it.

Global Capital: Has the Canadian MTN market been busy?

Belanger, RBC CM: In 2015 we’ve only had about C$1.9bn issued domestically. Last year we had C$10.6bn. There’s a few factors that have contributed to that. There were a lot of ultra-long MTNs, which in Canada means 40 to 50 years. There’s been less demand from investors in that part of the curve. Because of the lower demand, the pricing is not as attractive to issuers as it has been in the past.

There’s also been very few floating rate notes, partly because some of the rule changes around total return swaps in Canada have reduced the need for floating rate assets. Also, some of the larger investors that want to play in floating rates may prefer the liquidity in fixed rate bonds and just do the asset swap because they can get in and out more easily. 

The preference for liquidity means there is less interest for off the run bonds or private placements versus the more liquid benchmark bonds. That has all conspired to reduce MTN volumes. 

Steski, Manitoba: We used to have the luxury of selling a lot of MTNs all over the curve, but with investors demanding larger benchmark bonds we’ve concentrated on doing more public syndicated deals and building up benchmarks. 

Belanger, RBC CM: This ties in nicely with carve-outs, which are basically a privately placed portion of a larger syndicated deal. We’ve had about C$11.25bn of carve-outs in 2015, versus about C$3.3bn in 2014. It’s like the carve-outs have replaced the MTNs.

Investors want to get a big block of one particular name, instead of less liquid MTNs. Most of the issuers around the table have a protocol where investors can come into a domestic deal and take a portion, say C$200m-C$1bn, with the balance taken by and distributed through the syndicate. It’s still part of a larger benchmark deal. 

Manning, Ontario: We started our carve-out programme in October 2011. We thought it would maybe be a couple of deals a year, but over those four years we’ve had 41 deals and raised about C$23bn. It’s probably driven a little bit more primary issuance than otherwise.

One of the complaints of the larger investors we’ve met over the years about the primary issuance process in Canada is being able to get enough bonds. Typically our benchmark size re-openings are pretty big. It’s a $1bn minimum for five years, $750m for 10 years and $600m for 30 years, but even still, investors were saying they couldn’t get enough bonds in primary. We asked how we could solve that which resulted in the carve-out programme. 

One of the primary considerations was treating all investors fairly. We thought a carve-out process that allowed some of the larger orders to be accommodated, but at the same time made bonds available to other investors, could work. 

Belanger, RBC CM: If it’s a tough market you can use the carve-out as a catalyst to do a deal when you don’t think you can place a benchmark size deal that day, whereas if it’s a good market and you can place your full size then, great, you can issue a much larger size than normal. That means you don’t have to visit the market as often. 

Epp, Alberta: Some of the bigger funds are growing in size, and so this is in many ways an evolution of the market to accommodate that bigger size. Ontario took the lead and did a great job, and it’s working in this environment where liquidity is hard to come by. I don’t know if it will persist, but right now it’s working very well for us.


Steski, Manitoba: It allows us to get a deal done when we’ve had a tough time getting into the markets and we’ve really been pleased it’s worked for us.

Global Capital: Are you confident about the US dollar market in 2016, given the Fed looks like it’s on a rate rising cycle?

Steski, Manitoba: Even if rates rise we’re going to continue to monitor the arbitrage back into Canada. If it’s cost effective or fairly close to breakeven, we’ll be ready to take advantage. 

Manning, Ontario: It comes and goes and the costs change quite a bit but we’re very, very confident that we’ll be able to access that market again a bit later in this fiscal year. We already sold a $2bn five year global in May.

Epp, Alberta: We were very pleased with the $1.25bn five year we did in August. It was well subscribed and we’ll certainly be back. It can be tricky at times, but you’ve got to be opportunistic, patient, flexible and ready to go. A challenge for us is moving more to that mind-set. 

We have 144A documentation that gets us into the US and we’re looking hard at putting in SEC documentation because, even though we were very successful in August, there were some large players that bowed out. 

That sent us a good message that if this is to be a strategic part of our programme we need to change the way we approach it. 

Shingsar, RBC CM: The US rate rise is not a major concern, particularly as it’s expected and markets have largely priced it in. We haven’t had that many Canadian issues in dollars in 2015, but all of them have had their prices tightened and sizes increased.

We probably would have seen more issuance if the 10 year part of the curve had been a little more robust, but that’s more a comment on the broader 10 year dollar market than it is for Canadian provinces.

Global Capital: With US government sponsored enterprises reducing issuance, are Canadian issuers doing any work to fill the gap for the public sector US investors that buy GSE paper?

Manning, Ontario: We’ve been telling our story for several years — we offer a yield pick-up and safety, so we’re a great alternative. 

Love, EDC: We’ve been doing it for five or six years, basically since the beginning of the financial crisis — increasing our penetration into the US and meeting with US investors to offer ourselves as a safe alternative to GSEs. We’re a way for US dollar investors to get access to the Canada credit, which is a great story, so that’s really been effective. We’ve increased the amount of private placements we do with US investors and there’s a lot of participation from US accounts in our benchmark transactions.

We believe there is potential to expand our presence with US investors that have a green mandate. This segment is continuing to grow with new funds and mandates entering the market. US accounts were the prime participants in our first green bond issue. 

Bélanger, Quebec: We meet US investors on a regular basis and have done for many years. We offer a yield pick-up and high quality paper. But we focus a lot on 10 years, and as Jigme said that market hasn’t been there too much. 


Shingsar, RBC CM: There’s a long list of US public sector investors that have participated in provincial deals over the years. The reduction of GSE issuance is helpful for the diversification story. But there’s also a subset of public sector investors that just can’t buy non-US domiciled issuance, for technical reasons. But we do see very strong public sector participation, including for the most recent Manitoba deal.

Global Capital: Across markets generally, are you more concerned about access or price?

Ayre, CMHC: We’re a fairly regular issuer. We don’t publish a calendar, but eight times a year we’re in the market. Access has never been a big problem. We can get our benchmark sizes done, which is typically about C$5bn on the five year fixed rate tenor. 

If you look back to the crisis and the Lehman Brothers failure, we did some of our biggest issues through that timeframe. So access has not been a big problem over the years.

From a price point of view, although our secondary liquidity has fallen over the last couple of years the flow is still quite strong, so there is a good market for price discovery whenever we bring new issuance. 

Bélanger, Quebec: We’re concerned about both, but if you don’t have access then price doesn’t really matter. We try to be a regular issuer in four to five currencies. 

On the Canadian market, we build liquid benchmarks in 10 and 30 years and try to be as transparent as we can with investors. 

We follow the demand. If demand is in a different tenor we don’t force a deal. Demand has been patchy in Canada, but a big part of our borrowing programme has been done. But it’s always a concern, you never know what the Fed or the Bank of China could decide, or when there might be another debate about the debt ceiling in the US. You never know. 

Global Capital: What keeps you awake at night?

Epp, Alberta: Oil prices. They drive a lot of employment growth, a lot of revenues, and for good or for worse, our spreads tend to be linked with the price of oil fairly closely. That’s the big variable for Alberta and always will be. 

Ayre, CMHC: We are using in-depth stress testing scenarios to look at the effects on the housing market and CMHC from a sustained global deflationary outlook, low oil prices, rising unemployment and long term structural problems. The good news is that if you look at CMHC as a whole it’s a very well capitalised organisation so it would take a very large, long term problem to erode the capital of CMHC. 

Love, EDC: Negative swap spreads in US dollars. We issue in fixed rate and swap back to floating rate. At the start of the credit crisis swap spreads became negative in 30 years, this persisted and it eventually occurred in the 10 year maturity and more recently it’s been in the five year, followed by the three year, and now we’re facing this in the two year maturity. 

EDC issues in three and five years given the assets we are funding have an average term of just over four years, so negative swap spreads in these maturities impact our floating rate costs. Our credit spreads remain consistent with our peers, but the negative swap spreads on US dollar interest rate swaps will increase our floating rate funding costs. 

How long can they continue to deteriorate, and how negative will they get?

There are so many theories on why spreads are negative. I’ve heard that some of the new regulations have led to a decline in the use of the repo market and people are using the swap market instead. There also continues to be a fair bit of issuance from the SSA sector, where most of us are issuing fixed and swapping to floating rate. So that’s the supply and demand story with so many of us looking to do the same thing. 

The banks are not currently seeing the offsetting demand from counterparties that want to go the other way. As a result, there is downward pressure on swap spreads. 

There used to be a credit component included in the swap spread, but now we have central clearing for interest rate swaps, so that’s having an impact. The swap is viewed as being less risky than the sovereign and this is reflected in the fixed rate side of the swap which is lower than the US Treasury rate.

Shingsar, RBC CM: Each one of these has an impact at the margin. Everyone’s scratching their head, but there’s no one answer.

It creates a problem for any floating rate issuer because, even though their spreads versus US Treasuries have been stable, the Libor level — which is where they’re benchmarked — has gone dramatically wider, for SSAs in particular. That’s impacting SSAs’ decision making on near term issuance and it’s easy to understand why, but there’s very little you can do about swap spreads.

Love, EDC: The worry is the longer it stays like this, the more investors will get used to us being on the plus side of Libor. That will likely make it harder for SSAs to move back into the sub-Libor territory.

Shingsar, RBC CM: With negative swap spreads, a deal can offer what looks like an interesting Libor level but the Treasury spread will be lower, which investors aren’t used to. The vast majority of the traditional investor base for this sector may look at the marketing versus swaps, but they’re mostly fixed rate investors so the Treasury spread is still very important.

That’s not withstanding the influx of bank treasury demand, which is asset swap based, but even they’re suffering because it’s gone wider than they would have expected.

Manning, Ontario: The one area potentially that would be problematic is if there was an extended period of limited market access. I can’t see that being too long lived because investors have a responsibility to put their money to work. But if it was to happen it’s good to have back-ups. A lot of us have back-ups from a lot of different markets we can access, and quite often one market will be open while other markets are closed, so that helps. 

Our average term of borrowing is 16.1 years, which is quite long for us. So we can print shorter tenors quite easily. We have liquid reserves of about C$23bn, which is enough to keep us going for half a year or more. 

We also have very good short term borrowing programmes and issue treasury bills every week. There’s lots of capacity in our US commercial paper programme. We have an excess short term borrowing capacity of between C$26m and C$27m. 

Steski, Manitoba: Accessing the market on a regular basis is still our biggest worry. But we have tools to get through the times access is limited and once in a while you can bring $1bn through the door like we did in November. 

Wu, Department of Finance: We have no major concerns. Our funding focus is on the Canadian market, and our colleagues at the Bank of Canada track a lot of the macro issues in our markets and publish their assessments.

For example, they assess vulnerabilities in the financial system, which is an important factor. One thing they note in their June 2015 financial system review is that Canada’s financial system has been stress tested. The view expressed in the IMF’s financial sector assessment programme review in 2013 was that, with its strong capital and sound risk management, the Canadian financial system would be expected to be resilient in a potential stress event. 

We also have a prudential liquidity plan at the federal level — not just the foreign reserves but Canadian dollar assets in case there’s a disruption in the market.

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