The Maple bond market Canadian dollar bonds sold to Canadian investors by foreign issuers has been a remarkable success story in the last two years.
Since 2005, when Canada scrapped its Foreign Property Rule limiting how much pension funds could invest overseas, Maple bond issuance has grown from virtually zero to C$21.3bn ($19.6bn) of new issues last year.
Zeina Bignier, head of sovereign debt capital markets origination at Société Générale in Paris, points out that Canada holds a unique position among the smaller currencies in the international bond market. "The Maple market is very different from the other non-core currencies," she says. "It is the currency of a developed country that has strong ties with the US."
This gives the market depth and sophistication. Not only can issuers print sizeable deals, but they can also obtain long maturities of 30 or 40 years.
"There is strong demand for the long end of the maturity curve in the Maple market," says Paul Eustace, head of syndicate at TD Securities in London. "Pension funds like long dated assets and not many markets apart from Eurosterling can provide such long duration for issuers."
With that in mind, in mid-January this year, the European Investment Bank returned to the Maple market after a three year absence with a C$850m 30 year issue led by Scotia Capital and Royal Bank of Canada Capital Markets.
It was one of the largest non-government long bonds in the Canadian dollar market, beating those of domestic issuers, and the first 30 year Maple issue since a C$300m transaction from KfW in March 2006.
Justyna Janas, head of European fixed income origination and syndication at Scotia Capital, was delighted with the mandate and the investor response to the deal. "It is a significant transaction for the Maple bond market," she said at the time, "setting a new benchmark in terms of size and investor participation."
There is still plenty of room for issuers to make progress in finding new Canadian investors. So far, only two thirds of Canadian funds have gained the requisite internal permissions to begin buying Maple bonds.
"Some Canadian investors still have to learn about new credits," says Susan Rimmer, co-head of origination at Merrill Lynch in Toronto. "These investors can be fairly conservative, but they do their homework."
Petra Wehlert, head of funding at KfW in Frankfurt, has not been disappointed. "There is a very good demand for new names in the Maple bond market," she says.
Sure enough, the market is accommodating a steady stream of new issuers. In April this year, Compagnie de Financement Foncier, the covered bond issuing arm of Crédit Foncier de France, the French property lender, launched its first Maple bond which was also the first benchmark size covered bond in the market.
So far the range of structures offered by SSA issuers has been limited, but zero coupon bonds have appeared.
The Inter-American Development Bank brought a C$300m 2027 issue to the market in March. Lead manager Bank of Montreal followed up with a second deal, for Bank Nederlandse Gemeenten. The Dutch municipal bank sold a C$200m 2028 issue.
The driving forces of the Maple bond market are depth and diversification for issuers, new pools of fresh money that they have only just begun to tap; for investors, a wide world of new bonds to buy.
Cheap funding remains an attractive feature for issuers, although over the last year the pick-up they gain from the Canadian dollar-US dollar currency swap has fallen sharply. In the last few weeks this has been mitigated somewhat by a stronger bid to the domestic Canadian interest rate swap market.
The growth has been remarkable for a market that, until 2005, remained closed by the Foreign Property Rule, a piece of legislation introduced in the 1970s in response to Canadas steep budget deficit.
The FPR placed a 30% ceiling on what pension funds could invest outside the Canadian market. Scrapping the rule gave Canadian investors the chance to diversify their portfolios, just at the same time that domestic bond issuance was declining.
This created space for new issuers, the higher rated the better, since Canadian investors still needed to gain confidence in the new credits.
"We went from a closed Canadian market to an open, global one driven by the repeal of the Foreign Property Rule and investors looking for yield and credit diversification," says Larry Bates, head of debt capital markets at RBC Capital Markets. "As for the issuers, the Maple market offers them a new investor base and competitive pricing."
Next January, the market should get a further lift from the regulators, when withholding tax is scrapped. The tax effectively prevents Canadian entities from borrowing offshore in maturities shorter than five years.
Bates explains: "The cross-currency swap flow generated by the Canadians going offshore and swapping back to Canadian dollars is precisely the ammunition required to generate the swap bid to fuel further growth in Maples." This could reverse the dwindling of the currency swap pick-up caused by the heavy one-way traffic of the past year.