Safe-haven credits adapt to new life after crisis
Canada, its crown corporations and provinces have proved sought-after safe-haven assets for investors during the crisis era. Central banks have re-allocated assets to invest in the currency and Canada’s bond markets, underscoring the growth of the country’s economic importance. With bond supply set to fall as Canada and its provinces aim to return to a balanced budget by 2015 and a debt-to-GDP ratio of 25% by 2021, the outlook for Canadian public sector borrowers appears rosy. But all is not a picture of robust health in the Canadian economy. Domestic demand has started to sag, wages are stagnant and there are fears of a housing bubble. EuroWeek met in Toronto with senior Canadian public sector debt figures to discuss the extent to which these problems can harm Canada’s run of form, what positive factors there are to look forward to from outside the country and the outlook for their market.
Participants in the roundtable were:
Grant Berry, managing director, RBC CM
Mark Chamie, treasurer, Canada Mortgage Housing Corporation
Mark Hadden, managing director, head of government finance, Scotiabank
Andrew Hainsworth, managing director, debt capital markets, BMO
Susan Love, vice president and treasurer, Export Development Canada
Warren Lovely, executive director, head government strategist, CIBC
Mike Manning, executive director, capital markets, Province of Ontario
Jeremy Rudin, assistant deputy minister, Department of Finance
Jason Stewart, managing director and head of government finance, National Bank Financial
Garry Steski, director of capital markets, Province of Manitoba
Bernard Turgeon, associate deputy minister, Province of Quebec
Ralph Sinclair, SSA markets editor, EuroWeek
EUROWEEK: Splashed all over this morning’s edition of the Globe and Mail was perilous news of Canada’s household indebtedness. There’s been debate recently about domestic stagnation, a housing bubble, commodity prices have been on something of a recent slide. Should we be worried about the Canadian economy?
Warren Lovely, CIBC: We have seen the Canadian economy lose some momentum in general terms but also due to some specific shocks that we certainly wouldn’t expect to see repeated.
From a public finance perspective, the more muted tone to growth is something to watch going forward.
You will see governments acknowledge a slightly tamer growth backdrop as we move through the year. We still hold out hope that we will see an important global reacceleration into next year and 2015, which would provide some significant fiscal upside for public sector issuers in this country.
Jeremy Rudin, Department of Finance: In terms of the economic prospects, we are just beginning the process of updating the forecast. The quarterly GDP numbers will be coming soon and then as usual, we’ll update our fiscal projections, based on the average economic outlook that we take from a group of private sector forecasters.
In the short term, it’ll be interesting to see how individual forecasters interpret the data because we know that in June there were some special factors — flooding, strikes — that weighed on growth in the last quarter. However, we anticipate some bounce back from this in the third quarter.
From a fiscal policy point of view, we have a robust fiscal planning process and a very strong commitment to return to budget balance in 2015. We also build prudence into the economic forecast that underlies the fiscal projections.
That is of much greater importance from an investor point of view, much more so than short term fluctuations.
EUROWEEK: Are any of the dealers around the table fielding tough questions from investors about the Canadian economy?
Mark Hadden, Scotiabank: One of the more frequent questions we field from international investors are related to the housing market — first, how that’s going to impact the Canadian Mortgage Bond (CMB) programme and then second of all, how it’s going to impact the provinces if we do see a housing slowdown, especially the possible effects on borrowing programmes.
Jason Stewart, National Bank Financial: There are two other reasons why we are continuing to see inflows of foreign money into Canada from international portfolios.
The first is the much greater exposure of the Canadian economy to the United States, which is a huge advantage in both the near term and the medium term with the US’s economic prospects.
The second reason is the dwindling number of triple-A and robust double-A rated issuers worldwide.
Both on a relative basis and absolute basis, Canada continues to stand out as do the provinces and the federal crown corporations.
Grant Berry, RBC CM: There’s no question that we’re closely tied to the US and so clearly our situation’s very similar. Despite all the economic forecasts, the Canadian markets continue to be in very good shape.
Over the last couple of days we’ve seen very well taken-up transactions. The transparency offered in the Canadian bond market is key to what we’re doing in this market place. We will not suffer any more than in the US.
Andrew Hainsworth, BMO: We’re perhaps a little bit more bullish than some others on the US’s growth prospects over the next couple of quarters, but it is a rising tide that is going to lift a number of boats, including Canada’s.
We will have a little stronger US growth than Canadian growth over the next couple of quarters.
But the fears of the housing market bubble — if you want to call it that — in Canada have been very much overstated. Our economists are fairly comfortable that household formation and demand for housing show that the market’s in pretty good shape. There are excesses in certain pockets but overall, housing is in balance and the economy’s in OK shape. It’s not robust, but it’s OK.
EUROWEEK: What’s Canada Mortgage Housing Corporation’s take on the housing bubble?
Mark Chamie, CMHC: From CMHC’s perspective, overall we find the demographic and economic factors that everyone has spoken about remain supportive for the housing market in Canada overall.
We also include into that the expectations for continued economic growth and high net levels of immigration. We think all of that is in line with historical standards and is supportive for the housing market.
So we don’t necessarily see it as a bubble within Canada. We think that the market is well supported from a fundamental standpoint and we’re not expecting any drastic changes to it overall and this conclusion is supported by the OECD.
Lovely, CIBC: There’s a misguided tendency on the part of some international investors to project a US-style housing correction on to Canada.
We’ve examined housing risks from every conceivable angle at CIBC. A lot of other analysts have likewise tackled this issue and concluded that the two housing markets are fundamentally different. Moreover, the government response to the markets has also been very different.
The federal government in particular has taken some very proactive steps in Canada to help ensure the long term sustainability of the housing market and to prevent a US-style correction — or crash — from settling down on our shores.
We continue to educate investors and, as Mark points out, the state of the housing sector continues to be the topic of the first, second, and third questions you tend to get from international investors. But we’re pretty comfortable that due to some good policy action and governmental response, as well as Canadians taking a more cautious stance going forward, that we will prevent a more dire outcome from arriving.
EUROWEEK: Mark, since we’re talking about housing, CMHC has now a cap on the amount of mortgages that it will guarantee. Will have any impact on your yield curve or supply?
Chamie, CMHC: The short answer to your question is no.
The amount guaranteed under the CMB programme is separate and distinct from the market National Housing Act Mortgage-Backed Securities (NHAMBS) guarantees that you’re speaking of.
The NHAMBS market has an C$85bn volume limit for 2013 and that limit has no impact on our ability or willingness to provide guarantees on CMB issues.
We’ve been issuing and guaranteeing approximately C$40bn of CMBs per year over the last few years and our expectation for 2013 is that we won’t deviate significantly from that.
EUROWEEK: And what is the outlook for the other borrowers’ funding programmes over the coming year?
Mike Manning, Ontario: Ours has been moving along relatively well. We have a requirement of about C$33.4bn of which we have raised C$15.4bn as August 28 — so that’s about 46.2% of our programme that’s now completed, which is about 5.1% ahead of pace.
We’re happy with that because we’ve been a little bit behind pace for most of the year.
But this year’s programme has had very much a domestic flavour with about 83% of our bonds sold domestically. We had targeted doing at least 70%.
The average over the last 10 years is about 73% so that 83% is a bit on the high side. We think it’s going to come down, and we think we are likely going to be accessing the US market sometime in the autumn, possibly as early as September.
We’ve been very fortunate that the demand for our bonds has remained very strong.
We’re in a bear market in terms of interest rates but our average term of debt is about 14.2 years. For us that’s quite high. Our average last year was about 12.4 years. For the last three years we’ve been extending term — 13 years, which we reached the year before last, was the longest we’d had until now.
We think that reflects the fact we’re seeing good demand but it also gives us the flexibility later on in the year to move down the yield curve where we can achieve lower funding costs.
And in terms of our requirements this year, we’re very pleased that the C$33.4bn that we’re borrowing is C$5.7bn less than the amount we thought we would need when we published the budget in March 2012. Our short term borrowing requirement is C$1.5bn less than we thought it would be in March too.
Bernard Turgeon, Quebec: This year we have a C$11.7bn programme. More than 80% is now completed. We have raised C$9.5bn so far. That means that a further C$2.2bn remains to be borrowed, and we have seven months to do that.
The markets have been very good to us. We did a euro deal last July for €1bn and had 79 investors in an oversubscribed order book.
Investors like the fact that Canadian provinces and the federal government have plans to go back to budget balance and put public finances back in order.
Garry Steski, Manitoba: Our borrowing programme for the current fiscal year was announced at just under C$4.8bn. We’re slightly over 50% done. Our programme is really separated into two parts — the province’s needs and those of Manitoba Hydro, our hydroelectric utility, which requires a significant amount of borrowing.
Manitoba Hydro is undertaking a huge capital expansion for both transmission and generation and so their needs are fluctuating. That has left us a little bit further behind than what we would normally want, but there’s also some uncertainty as to how quickly those projects are going to proceed. We would expect for next year the programme will be around the same amount.
We did a US dollar global issue at the start of the year. We like to get into the US dollar global markets at least once a year and more often if the opportunity presents itself.
Chamie, CMHC: We’re on track to raise approximately C$40bn by year end if we continue at the exact same speed that we’re issuing right now. We’ll probably be C$1bn-C$1.5bn short of that maybe, but that’s why I always say it’s approximately C$40bn a year. It depends on the interest from mortgage originators and investors at the time that we’re issuing.
We tend to balance our issuance overall based on the demands of both sides. We do the same for our product mix as well because we issue both five and 10 year fixed rate issues as well as floating rate issues which have historically been offered on a quarterly basis. We try to rightsize those issues to balance the needs of both sides of the funding equation.
Susan Love, Export Development Canada: EDC’s story this year is similar to last, where we started out thinking we would borrow somewhere between $6bn-$7.5bn in 2012 and we saw our needs increase so that we borrowed just over $9bn in the end.
This year we started again expecting to raise $6bn-$7bn and we’re now forecasting needs of just over $8.2bn.
To date we’ve borrowed $5.5bn, so over 65% has been done. We’re well on track.
Given the markets this year, we’ve had to be flexible in terms of what we’ve done and in fact, we just recently issued our first syndicated floating rate note. The debate about the tapering of quantitative easing and potential rate hikes in the US means investors have been looking for shorter term money that’s floating rate in nature.
So EDC adjusted its strategy and we issued a floating rate note in the two year sector which isn’t as typical trade for us.
In these types of market conditions, it’s important to be flexible. Given the continued uncertainty, issuance windows are not open as widely as they have been in the past, so you must make sure that you’re aware of the environment and enter the markets with the appropriate product tailored to the investors at the right time.
EUROWEEK: EDC is probably the Canadian borrower with the most natural need to be in a variety of different markets. Are there any that you anticipate entering into in the short to medium term? And other than the floating rate note you sold, are there deals that you’ve done so far this year that were new and innovative for you?
Love, EDC: We did our first Dim Sum bond, a bond that was issued to investors in Hong Kong in Chinese renminbi.
We had been exploring the idea for about a year and a half. We put the documentation in place which allowed us to access the market when the timing was right. It was a very successful transaction, and we were pleased to be able to do it. On the heels of that, we will be visiting with investors in Hong Kong in a couple of weeks’ time. We will continue to follow market developments in this area and look to explore other markets in a similar way. As well, EDC has a number of assets that would be qualified as environmentally friendly or socially responsible. We are examining those assets and will look to potentially issue a Green Bond based on those assets in the future. That would be something new for us and would respond to the growing demand for socially responsible investments.
EUROWEEK: Bernard, you mentioned Quebec’s euro deal earlier. Can you talk to us a bit about what motivated that and how you found the experience?
Turgeon, Quebec: Quebec has traditionally been a borrower on foreign markets. Our first borrowing on the US market was done in 1879. We were the first foreign borrower on Wall Street, according to the New York Evening Post of that time.
In European currencies, Quebec has been borrowing since the 1960s, so it’s natural for us to be on the euro market.
Our first deal on the euro market was a private deal made 11 days after the currency was created in 1999. We did our first benchmark issue in June 2001 and have done six benchmark issues since then. The European market is a huge market and investors there want to buy Quebec paper.
We monitor conditions on a continuous basis and this summer, after having done a non-deal roadshow in June in Europe, we concluded that the time was right to do a bond issue.
The transaction was a huge success with a large number of high quality investors taking part.
We are very glad to have done it. We had not done any deal on the euro market since 2009, so it was a long period between the two deals.
EUROWEEK: Canada has also issued euro denominated bonds but not since 2011. Is Quebec’s success the kind of thing to whet the sovereign’s appetite for more euro issuance?
Rudin, Department of Finance: We issue in foreign currencies to fund our foreign reserve programme, otherwise we issue for general government purposes in Canadian dollars only.
We use a mix of foreign currency funding sources and we have emphasised trying to diversify our funding sources over time.
Cross-currency swaps are still the most important source, but in recent years we have also returned to the global bond market — once in euros, and most recently in US dollars.
As set out in the Debt Management Strategy, released as part of the budget in March, we have an interest in potentially going back into the global market. Not only will it provide a certain diversification of funding sources, it also sidesteps the counterparty risk which still exists to some extent in the swap book.
But the economics have to be there to justify a deal and so it remains to be seen when, and in what currency, we might consider issuing.
That said, we are, for this year, planning on getting back into the medium term note market. Investors will have an opportunity through a reverse enquiry process, to show their interest in Canada and get an investment that is tailored to their needs. Issuance of medium term notes is a good tool for us because it can help us to manage the matched funding of our foreign currency assets, avoiding some of the lumpiness that’s involved with issuing global bonds.
We’ll be starting that off in our typically prudent Canadian manner, but we do expect that that will be a success and we’ll be speaking to dealers about it in the near future.
EUROWEEK: What sort of volume do you anticipate that could bring?
Rudin, Department of Finance: Well as I said, we’ll start out modestly and based on experience and we’ll have more to say about potential volumes, I presume, in the upcoming Debt Management Strategy.
EUROWEEK: So it’s a case of toes in the water first?
Rudin, Department of Finance: Yes. With respect to domestic issuance, our stakeholders know that our general approach is to release the Debt Management Strategy with the federal budget shortly before the beginning of the fiscal year, and that we rely on a planned, regular, and transparent issuance schedule.
That makes it quite predictable and we’re certainly tracking quite close to the Debt Management Strategy we set out in March of this year.
Generally speaking, our financing requirements are down, partly because of our improvement on the fiscal track but also because of the maturing over the coming months of most of the assets that were purchased during the financial crisis under the Insured Mortgage Purchase Programme (IMPP).
As a result, our planned bond issuance for this year is about C$87bn. That’s down from the previous year and certainly down from the peak during the financial crisis. The treasury bill stock is projected to decline from about C$190bn now down to about C$150bn at the end of the year. Much of this impact is the maturing of the IMPP assets.
We have also adopted the practice of reassessing the bond programme over the course of the year to see if we need to make a material adjustment to the programme.
If we do make an adjustment we announce it.
This has given us the opportunity to be more nimble, rather than being locked into a rigid annual plan even as circumstances change. At the same time, it doesn’t seem to have undermined our reputation for predictability and transparency. I’d argue it has enhanced it.
EUROWEEK: And the Canadian sovereign is also interested in an ultra-long deal. Whereabouts is that project?
Rudin, Department of Finance: We made it explicit in the Debt Management Strategy that that is something that we would consider and we’ve been looking at it quite actively and discussing it with market participants. No decision has been made at this point.
EUROWEEK: So it may come this financial year?
Rudin, Department of Finance: It remains an option.
EUROWEEK: What do the dealers think are the opportunities for Canadian public sector borrowers in international markets?
Berry, RBC: International markets have always been a important portion of Canadian public sector borrowing programmes, accounting for about 20%-25% of total borrowing. Over the years the percentage has varied with the provinces issuing in Canadian dollars and US dollars, followed by euros, Swiss francs and sterling.
Of course, cost is always a factor when borrowing abroad. Sometime borrowers focus only on cost while others execute these trades as investments to broaden the basket of investors they can access.
Sterling and Australian dollars are open to Canadian issuers — those are the more opportunistic markets.
Stewart, NBF: The sheer growth in central bank buying of provincial or domestic issues has been quite staggering.
We are dealing with six to seven times as many central banks as we were three years ago. A growing number are looking to buy Canadian dollars.
Every borrower around this table has the option to do all of its funding in Canadian dollars, with the exception of EDC.
International investors will participate either in Canadian or US dollars as well as a range of other currencies. Canadian borrowers’ fiscal strengths and their disciplined approach have given them much more flexibility.
Hadden, Scotiabank: International investors still hold a positive view of the Canadian provinces from a credit perspective, especially given the strong fundamentals and sound financial system.
From an issuance standpoint, although it’s a little more challenging to fund cost effectively in markets such as Australian dollars and sterling, it certainly seems like US dollars continues to be a focal point. The US market provides a great opportunity to broaden exposure to international investors (away from and in the North American region) while in some cases achieving a more reasonable cost of funds when compared to the domestic market.
Hainsworth, BMO: The US dollar market certainly represents a very large liquid transparent market for Canadian provinces. It’s a great safety valve, especially for some of the larger provinces whose financing programmes are almost a bit too large for the domestic market to accommodate in a cost-effective manner.
Ontario has a flexible approach about how much of its borrowing gets done in Canada while wanting to keep a core presence in the US dollar market.
I think euros has probably been a little bit disappointing in general for provinces over the last decade. They used to be quite active issuers, in Deutschmarks and French francs and so on.
It would be nice to see that market broaden its appeal and I think certainly there’s demand for provinces, as Quebec has demonstrated.
Sometimes the challenge for a number of provinces is just the cost effectiveness of that market, especially with some of the cross-currency swaps involved in those trades. They can be capital intensive.
EUROWEEK: Can Canadian public sector borrowers serve an international investor base in Canadian dollars just as well as they can in foreign currency markets?
Hainsworth, BMO: Yes and no. There are a lot of investors who are still not active in the Canadian dollar market. A number would still like to see provinces more in the US dollar market than they would in Canadian dollars.
Also sometimes the issuance style of provinces in the Canadian domestic market can work against international distribution. Canada has a very unique approach for provincial financing in terms of bought deals that are launched, priced and distributed very quickly.
CMBs, for example, are a much easier way for international investors to participate. They leave a 24 hour window typically between launch and pricing — more like a global bond.
It’s not to say either approach is better or worse, it’s just they have different implications in terms of investor distribution and appeal.
Berry, CIBC: That being said we have seen some innovations in the Canadian domestic market over the past two years in terms of trying to accommodate large investors offshore. The additions benefit both investors and issues alike.
Lovely, CIBC: My read of the investor demand and bond supply fundamentals leaves me overwhelmingly constructive on the Canadian public sector. We’ve talked about the greater breadth of investor participation but what I continue to find most striking and I think is an underappreciated element is that the net supply is in decline. And that’s really the key consideration here.
Canada’s governments are increasingly borrowing to refinance maturing debt. If you control for this and examine the net supply of bonds brought to the market, you’ll find that while we’re not quite in an entirely scarce environment, net bond supply is dwindling. That makes for a very constructive picture — strong, broader demand against a more constrained supply outlook.
Hainsworth, BMO: One other source of demand for Canadian public sector issuers has been financial institution treasuries, especially Canadiana banks in Canadian dollars.
In the last couple of years with the demand for banks to hold more tier one assets, we’ve seen bank treasuries, in particular, much more active as a source of demand. It mirrors what’s been happening globally.
EUROWEEK: Garry, has that matched your experience?
Steski, Manitoba: Yes. We completed an investor relations trip to Asia in early March and met with several investors in Seoul and Beijing, and a lot of the conversations turned to Canadian dollar issuance and the process of issuing Canadian dollar bonds.
The deals are put together and distributed very quickly and the fact is that international investors can’t react as quickly as what they would like to that process.
We were surprised at the amount of discussion around Canadian dollar issuance while we were over there.
EUROWEEK: Have you done anything to make your Canadian dollar deals more accessible to international borrowers?
Steski, Manitoba: The public issuance process is what the public issuance process is going to be in Canada for the time being. It’s not a book-building type of process for the Canadian provinces and international buyers would rather participate in some of these larger transactions but they happen so quickly.
Having said that, we do an awful lot of MTNs and FRNs as well, which are one-off, smaller, reverse enquiry type transactions, so those options are also available to investors.
Stewart, NBF: The other aspect to highlight is that a number of Asian and European central banks now have offices in New York and that has changed their accessibility.
It is facilitating their participation, but it is moving far beyond just central banks as well.
The number of institutions in the Canadian and Australian dollar markets has risen now that those currencies are a focus for international monetrary reserves for various countries around the globe and are now being tracked by the IMF.
So Canadian dollar issuance is pretty powerful for Canadian borrowers.
That being said, US dollars continue to bring a whole range of US-based investors who just do not purchase Canadian dollars yet, as well as a number of offshore investors.
EUROWEEK: Those Canadian dollar investment funds then are presumably quite sticky if they’re central bank funds. They’re not likely to just shut up shop and vanish back into whatever they were invested in before.
Stewart, NBF: There are different investment management styles among the central banks.
I think there has been a net positive inflow into Canadian dollars but some central banks are active managers and others make adjustments less frequently in terms of their index, whether it’s monthly, bi-monthly, or quarterly.
There are a range of styles, but an increasing number of active investors.
EUROWEEK: And do you see that money sticking in Canadian dollars?
Berry, RBC: Well, it’s very different than it was back in 1990 when we had a lot of hedge funds in play, and we had public sector money from Germany, France and Dublin coming into Canada. The buying of unrated public sector bonds was good value.
With the meltdown of course, that all unwound — in 2009 that all changed.
We came into a new situation where the number of central banks buying these bonds went from probably five to 20 very, very quickly, and they have been high quality investors. However, as Jason has said, the investment styles do change.
But the desire to get into Canadian markets is still there and I think the combination of more access, more information and a continued view of Canada as a good place to be, is unlikely to go away any time soon.
Hadden, Scotiabank: Global investors see much better transparency in terms of borrowing intentions from our public sector issuers. The deeper liquidity pool has been a strong positive as well, especially as investors look to manoeuvre through entry and exit points for very large, concentrated positions.
The depth of liquidity has also been a benefit for issuers too. As secondary product moves fluently there hasn’t been much disruption to available windows for issuers looking to access the primary markets. We’ve found international funds have been more comfortable operating in this type of environment.
EUROWEEK: What are investors demanding more of from Canadian borrowers, especially in terms of instruments, and the sort of contact they have? Susan, EDC has a very international investor base. What are they telling you?
Love, EDC: They’re interested in the Canadian economy and what’s happening in terms of growth. Naturally, as an export credit agency, investors ask us about Canada’s exports. As well, they are focused on Canada’s level of debt and the impact that at US recession would have on Canada.
They’re very concerned about the Canadian housing market and whether or not there’s a housing bubble in Canada.
In terms of products, investors are asking for simpler ones than they wanted before the crisis when structured products were more popular. They want instruments that they can understand and explain.
Given the volatility in the markets right now and the uncertainty with respect to US interest rates, many investors are looking for shorter term products as there’s less risk in terms of what they might lose if interest rates go up — hence why EDC did their short dated floating rate note.
When there’s more certainty about where rates are going we’ll see investors moving out further on the yield curve, five years and beyond.
Manning, Ontario: Our philosophy is when we’re issuing in foreign markets, we have a responsibility to keep those investors informed about what’s happening. For example, we did $9.75bn in US dollar deals last year, right across the yield curve. We did three years, five years, a seven year deal, and a 10 year deal.
Standards are getting higher. Investors are getting a better understanding of Canada and the provinces, and they like the fact that people do take the time to meet with them personally.
The demand for investor relations remains high and the standards are getting higher as well in terms of the amount and quality of information we provide.
Turgeon, Quebec: What strikes me with foreign investors is that, in addition to the fact that they want to understand what is going on in Canada, Ontario and Quebec and so on, they want liquidity.
They want to be able to have access to the market — to get in and out. For the larger investors, this is their first priority and the provincial bond market in Canada is very liquid. The dealers do what is necessary to achieve that, and that’s why foreign investors are coming to Canada and they will continue coming into the Canadian market.
Love, EDC: Investors also like to see the sustainability of a programme because, with the amount of work they have to do in order to get a credit approval, it’s preferable if the issuer plans to access the market on a regular basis.
So if you are going into, say, the Kangaroo market, as EDC has, it isn’t just for one issue. Investors want to know that you’ll be able issue on a regular basis throughout the year. That’s what makes it worthwhile for them to do the work to approve a credit and to keep it on their approved list as well.
Steski, Manitoba: Our programme is relatively small compared to the other issuers on this panel and as a result we’re more of an infrequent issuer into those international markets.
One of the things we hear from international investors is they’d like to see us back in the markets on a more regular basis. We will also continue to try to accommodate them in terms of meeting with them while doing investor relations work.
EUROWEEK: The sovereign doesn’t have that problem, does it? It can pick and choose which market it enters and when, and its international borrowing needs are relatively low compared to the rest of its programme.
Rudin, Department of Finance: Yes, very much so. International investors are interested in the Canadian story. There are very few sovereigns left that are considered in the top tier of credits. And of those, I’d say Canada has the deepest and most liquid bond market.
That said, we haven’t needed to pursue an active investor relations programme. Investors have been coming to us, which is another way of saving taxpayer money.
We have invested some effort into improving the information we provide to investors. We have a long standing commitment to transparency and predictability of the issuance. In communicating with Canadians about the fiscal plan, the government is also communicating with investors at the same time.
The medium term notes programme will meet an important need being expressed by international investors. That said, whether it’s in the foreign issuance or it’s in the domestic market, our aim is to try to come up with a bond programme that is going to raise stable, low cost funding in the interest of Canadian taxpayers, and that will also be welcomed by investors.
For example, certain investors have welcomed the recent increased emphasis in the 10 and 30 year sector in our programme but we haven’t done that specifically to cater to investors. We’ve done that because we feel from a taxpayer point of view that it’s prudent to lock in longer term funding at historically low rates.
EUROWEEK: And has there been greater demand on the sovereign for investor relations or from investors? Or are people just happy to buy, regardless?
Rudin, Department of Finance: We are available in Ottawa for investors who wish to come to see us. Over the past couple of years, we’ve had numerous delegations visit. I’m sure investors would like us to issue globals more regularly to build a curve, etc. But our experience is that even though Canada chooses not to commit to be a regular issuer of globals, this hasn’t prevented our global bonds from being strongly oversubscribed and, from our point of view, very attractively priced.
EUROWEEK: From a dealers’ point of view, are there things that Canadian public sector borrowers could do more of in terms of IR work?
Hadden, Scotiabank: Our public sector issuers recognise the importance of getting out on the road, and meeting investors face to face. Obviously, a key target continues to be the US investor base. However, focus isn’t lost on the importance of discussing their respective stories through Europe and Asia as well, answering questions on fiscal and borrowing plans. Collectively they all see IR as a crucial investment, whether that’s in person, over the phone, or communicating the story or fundamentals through a website platform.
Lovely, CIBC: Canada has held a prominent position on the world stage for five-odd years now and, increasingly, international investors require less of an introduction to the country and its issuers, and want instead a deeper look at economic and fiscal prospects in order to fine tune their view.
In that regard, Canada’s public sector borrowers are very good at demonstrating transparency in their financial reporting.
IR work will always have a very important role to play. As more and more investors increase their understanding of the country, get more and more comfortable with its credits, we could see an evolution in their participation in the public sector, whether that is across products within an individual credit, across the term structure or across the credit spectrum.
We fully expect that this evolution in investor participation will be facilitated by the changing supply situation, which we view as constructive overall for Canadian public sector issuers.
Hainsworth, BMO: The breadth and types of credits that some of the foreign investors look at — covered bonds from Canadian banks, for example — have been extremely well received in various currencies, both when they were the CMC insured mortgages, and since the last few months when they haven’t been.
The high yield market in Canada has had a very significant renaissance in the last couple of years and there are foreign investors in that as well. So they’re very willing to look at various types of credits, and not just in Canadian dollars. That is the halo effect of public sector Canada, the rising tide, lifting all Canadian boats.
Berry, RBC: Even when you look at the municipalities, they are getting more coverage and more term access. Investors are doing the work. They are going down that extra level to find value, and looking at that pick-up versus the provinces. We haven’t seen that in a long, long time.
There were municipal deals that were being driven by hedge funds. That’s encouraging for public sector in general.
In Canada, of course, really there are only four or five big issuers. You compare it against, say, the US where there are thousands of municipal issuers. Anyone coming into Canada can figure out how this market works. That’s a benefit to investors and issuers.
There is also great liquidity. There are 10 or 12 banks in intense competition which ensures we do a good job.
Investors coming to Canada recognise that the banks are strong, they’re committed, and there’s a reason why they’re going to be there every day making sure things work.
Stewart, NBF: The public sector has done a great job of addressing issues that have been at the forefront of investors’ minds. Not only is there a very sophisticated IR programme run by each of these borrowers, but they are right on point in terms of addressing issues like the housing sector and, quite frankly, a lot of the misinformation supplied by the popular media coverage of the issue.
Secondly, there is no substitute for one-on-one visits or small group presentations to help separate what passes for information but is actually noise. By getting in front of investors, you focus them on the credit, and every issuer around this table has been very good in that regard.
Demand for IR work is going to increase with the number of new investors.
One side bar to this trend is that the ability to trade in large size with very modest impacts on spreads is a distinguishing feature of the Canadian market versus elsewhere.
It ties into the IR side — how big a size can I purchase? What’s the bid-offer spread? How regular is that market? It makes a big difference.
EUROWEEK: Is the biggest challenge to the Canadian public sector borrowers dealing with that misinformation about the economy?
Stewart, NBF: The bigger question is how the US Federal Reserve implements tapering of quantitative easing and the distinction between tightening and tapering. None of us around this table can miss that. We were having a discussion five months ago about this risk. If one looks at the rise in US rates and Canadian rates since the beginning of May, the ability of every issuer here, whether it is Canada, whether it is CMBs, or the provinces, their issues have performed impressively.
Also, in a bear market, you have more volatile opportunities. You have shorter-lived opportunities and you have multiple issuers trying to take advantage of those opportunities. A bear market is much more challenging to manage.
Manning, Ontario: Since May 2 until the end of August, yields between five and 30 years bonds have risen 80bp-100bp. Throughout that period, as a borrower, we have found demand very sporadic. Demand was very lacklustre at times and so, as you go through this type of environment, you’re a bit concerned about your overall programme.
We don’t know what the Fed’s going to do and what the market reaction’s going to be over the next couple of months.
There are always other geopolitical events that are out there as well that could have an impact on access to markets. As a large issuer, we are always worrying but access, given the bear market, is something that we’re all concerned about.
Berry, RBC: The key question right now is what are the risks that we can’t even see? It was only two years ago when all of a sudden we had extreme violence in North Africa. We had a nuclear meltdown in Japan. Right now we have Syria.
Everyone’s trying to be very well funded ahead of time. It may not look like an opportunity, but an extra buffer is prudent, especially in a bear market.
If you go back to 1994, we could not do a long dated deal from January to August, and a lot of players now have never even seen a bear market. It’s a different trading mentality. We’re all going to be looking at the next Federal Open Market Committee in mid-September. No one knows what will happen, but I think being ahead of the game is where to be.
Chamie, CMHC: The US debt ceiling is starting to arise in conversations again and there is still ongoing implementation of regulations which could be game changers in some markets as well.
All of these issues point back to volatility. That is what has the biggest impact for us and most issuers in terms of our ability to be able to execute deals, continue to provide and find liquidity in the markets and so on. This remains something that we monitor very closely. Rising or declining interest rates, as long as it’s done at a measured pace don’t worry investors too much.
It’s when there are sudden unexpected movements that investors tend to step back, keep the cash on the sidelines and re-evaluate, and it’s those sorts of situations that I think we are the most concerned about.
Steski, Manitoba: From the treasury’s standpoint, we continue to worry about access to markets and being able to fund ourselves when we need to.
For the big picture, with the challenges the federal government and some of the provincial governments are having in returning to surplus, I think we have to remain diligent in getting cost effective funding for the province and not introducing any long terms risks related to that.
Rudin, Department of Finance: We continue to re-learn the lesson, that there’s a degree of uncertainty that you have to live with; that it’s irreducible in some sense and can be quite significant.
From the point of view of fiscal planning and debt management planning, being aware of that and planning to deal with its potential amplitude is more important than listing all of the potential sources of worry.
We have also now completed the implementation of our prudential liquidity plan. This ensures that we always have enough prudential liquidity available to meet our needs over the coming month, and that includes government expenditures, coupons and debt refinancing.
That said, this is a plan very much for tail risk based on our experience with recent liquidity events.
Canada has been able to access the market when others can’t. The important lesson has been in learning to plan for this sort of uncertainty. In terms of being able to execute the debt programme, as I mentioned, what we rely on is domestic issuance — bonds auctioned on a predictable schedule.
We do some funding, notably globals and soon medium term notes, where market conditions could conceivably deter us from issuing for an extended period. But we aren’t reliant on those programmes, we can fund entirely in the domestic market using planned and predictable auctions.
Hainsworth, BMO: Some of the dangers in the world almost play into Canada’s strengths. It is a strength that we have such experience in the public sector in terms of accessing financial markets. There’s a great diversity of markets that these public sector borrowers are tapping into. The borrowers are prudent in terms of either pre-funding or having large liquid reserves — having options. There are a lot of elements that work in Canada’s favour.
I don’t want to sound complacent but I think this group of borrowers here has done a pretty good job over the last few years and I think that gives investors a lot of comfort that you know where you stand with Canada and its public sector borrowers.
Lovely, CIBC: One of Canada’s key strengths, perhaps our country’s chief strategic advantage, is a financially sustainable government sector. In that sense it’s vitally important that federal and provincial governments maintain their fiscal discipline, even in the face of what could be some disappointing or muted growth ahead, or, in some cases, political pressure.
I’m encouraged by what I’ve heard and seen from Canadian governments, those represented around this table and the others not in the room. I think it’s also vital that governments continue to budget prudently to maintain liquidity and access to markets and to position themselves for what really are the known large scale challenges that lie ahead, be they demographic or other pressures, and to leave room, fiscal capacity, and fiscal flexibility to respond to that next shock that unfortunately might be around the corner.
Hadden, Scotiabank: Rising consumer debt levels should be a red flag to monitor. If it worsens, how that might transition into public finances will be important to watch as well.
Market liquidity is important too. Our public sector borrowers see exceptional liquidity in the market. We’ve looked at dealer secondary trading statistics in the second quarter. Trading in just Ontario bonds maturing in 10 years out to the long end of the curve almost surpassed the total secondary trading volume in the entire corporate market. Liquidity is very strong — I think another risk to provinces, especially the smaller issuers, is if that starts to dry up.
Turgeon, Quebec: I share the preoccupations that were expressed by my colleagues about the Fed tapering and the other challenges faced by the markets. I think that, as governments, the best we can do is, first of all, to stick to the fiscal consolidation plan, eliminating deficits and reducing debt.
A second thing is to manage financing and debt in a very prudent way. In Quebec we have put in place over the past year a prudential liquidity fund. There is now C$6bn in that fund. We can be out of the market for about six months with that. We didn’t have that before. So in a volatile environment you must put in place instruments that will allow you to face difficult situations, and this is what we have done.
Love, EDC: A constant theme for this year has been volatility. How borrowers are able to manage themselves through periods of uncertainty and maintain access to a variety of markets are key. Keeping in touch with investors, addressing their concerns, listening to the types of products they’re asking for and being able to adapt yourself as a borrower to their needs are all important. That’s what will allow you to come through this period of volatility successfully.