* Commerzbank AG
Maturity: April 8, 2002
Issue price: 100.525
Fixed re-offer price: 99.35
Spread at launch: 15bp over the 5.5% September 2002 Canadas
Launched: Thursday March 11
Lead mgr: TD Securities
Redemption flows always play a part in Canadian dollar new issuance and this issue was no exception. Also driving the deal, however, are the strong flows we are seeing at the short end of the curve.
Prompting this demand are the higher coupons now available in the sector and the increasingly positive sentiment towards the currency. The potential for a firmer C$ has prompted a lot of interest at the short end.
The last C$ deal, a three year issue for Rabobank, came with a sub-5% coupon and we were able to bring a new issue with a 5.25% coupon at a time when investors are starting to see value in the currency.
Sales thus far haven't been to retail but have come from institutions which want to buy short term C$ and which aren't too fussed about liquidity. Over time we expect the bulk of the transaction will go to retail.
"...the idea behind this was to anticipate the reflows that are coming up next month but there is so much other paper available in the market I don't see the value in bringing a three year bank name.
This doesn't look particularly good value against other issues in the market and broke syndicate quite a lot wider than where it was launched."
"...this came at 15bp over the benchmark, but the first price was at 24bp over. That is normal in this market where deals are normally bid at the full fees level and it also makes the deal more attractive for investors. At plus 15bp the Libor level was around minus 7bp, but we can now offer the paper at around Libor flat.
The choice of a short maturity was not bad as the Canadian curve is quite high at the short end and they were still able to achieve an attractive 5.25% coupon. The maturity offers an alternative to the five year deals we have been seeing.
The name is also well regarded and different to the likes of TMCC and Manitoba. Overall we are quite positive about the deal, even if Canadian dollar flows are quite sluggish."
"...we have not seen many flows in Canadian dollars recently -- nor for Aussies or Kiwis -- but issuance has not been excessive and we had room for a new deal on our books. Demand is solely redemption driven, but we still need something to offer investors.
This should be OK as the coupon is attractive compared to other deals this year and the 5.25% coupon was achieved through going out only three years. Commerzbank is a name that has worked before with Benelux investors and it should be welcomed just as warmly here."
Compiled by Frank Hracs, director of fixed income research, TD Securities, London. Tel: +1 416 982 8785
The Canadian bond market generally consolidated after the volatile trading activity the prior week. The week's data highlight was the February Employment report on Friday.
The Province of Quebec tabled its annual budget on Monday. As a surprise, a balanced budget was announced for the current fiscal year, 1998/1999, just ending, while the upcoming fiscal year is also predicted to be in balance as well.
Recently announced transfer payments from the federal government were a significant contributor to the accelerated budgetary balance scenario. The country's banking system received a blow from the Dominion Bond Rating Service on Tuesday as credit ratings were reduced a notch.
The key explanation was the disallowed bank mergers (officially rejected last December) which has fuelled concerns about the ability of Canadian banks to compete globally.
Commodity prices posted some meaningful advances during the past week and this boosted the fortunes of a number of resource stocks (oil, gold and the Bridge CRB index rose on the week).
However, the C$ failed to benefit from this typically supportive development. The C$ traded in a range of C$1.5110-C$1.5250/US$ versus a close of C$1.5180/US$ last week.
To some degree the currency is on hold due to relatively huge amount of Canadian government bonds maturing in March, of which perhaps 20% may be repatriated to offshore investors.
Recent concerns about the possibility of a Fed tightening accompanied by no change in Canadian administered interest rates (which would tend to weaken the currency) appear to have de-escalated.
Compared to US rate levels, 10 year government of Canada bond yields remained less volatile. The Canada/US 10 year spread widened to 5bp, from 2bp at the end of last week. Absolute 10 year Canada yields fell about 7bp on the week versus about 10bp in the US.
For the week ahead, the Canadian economic data calendar is relatively substantial -- manufacturing orders and shipments for January are reported on Tuesday, while the January merchandise trade surplus is set for Thursday. The CPI data for February is due for release on Friday, March 19.