In Canada’s bond market, 2013 has been a year of strong investment grade issuance, especially in the corporate sector. Firms have pulled off numerous refinancings, liability management exercises and, more excitingly, merger and acquisition financings.
Four bonds to finance M&A have been issued this year, totalling C$3.9bn — far ahead of 2011’s full year record of C$1.582bn, according to Dealogic.
“The Canadian high grade market has been very happy to finance acquisitions in 2013,” says Susan Rimmer, managing director and head, debt capital markets — corporates and financial institutions at CIBC. “The domestic M&A calendar has been quite robust this year and we have seen bridge takeouts in the bond market, for example the escrow deal for Sobeys, which is buying Canada Safeway, terming out the bridge for the benefit of the acquisition.”
Supermarket chain Sobeys bought more than 200 Safeway stores in western Canada for C$5.8bn in June. To finance the deal it issued C$1bn of 2018 and 2023 bonds in July, alongside an equity offering by Sobeys’ parent Empire, a sale and leaseback and a loan.
“Over the last 12 months we’ve seen some household Canadian brands make transformational acquisitions, both domestically and abroad,” says Sean St John, co-head of fixed income at National Bank Financial in Toronto. “Having the likes of [retailer] Loblaw, Sobeys, [telco] BCE and [convenience store chain] Couche-Tard all finance these acquisitions in the Canadian market speaks volumes about the depth and breadth of the investor base.”
The growth of the Canadian bond market in the past few years has given Canadian companies access to domestic capital they have not had before, which St John believes is fuelling growth in the Canadian economy.
The average deal size has risen, partly driven by investors’ desire for liquidity, according to Greg Greer, head of debt capital markets at Scotiabank in Toronto. “As a result, transactions are sized according to demand, while giving consideration to the issuer and its needs,” he says. “In addition, the potential to print larger deals attracts global borrowers, borrowers that are active in other debt capital markets, to the Canadian market.”
The largest non-financial corporate deal of 2013 so far was the C$1.7bn bond for Telus, the telecoms and satellite TV group. The C$1.1bn 11 year and C$600m 30 year notes were an example of companies using liability management to take full advantage of low interest rates. These larger deals cater for Canada’s growing investor base.
“In a typical investment grade deal, around five years ago, you would have had 40-45 buyers; today you have 100-plus buyers,” says St John. “Given the growth of the number of investors and the money available in fixed income, the market has been able to deal with more supply, bigger size and more diverse issuance.”
This has not only come from Canadian companies. Around C$4bn of bonds have been issued this year in Canada’s resurgent Maple market, among them European heavyweights BHP Billiton and Anheuser-Busch InBev.
“We saw significant Maple bond supply this year, as issuers were looking to broaden their investor bases into Canada,” says CIBC’s Rimmer. “And issuers were able to do so at a cost of funds that was competitive with global markets.” (See page 60)
US bid keener for long bonds
Canadian investors will buy bonds with maturities from three to 30 years and in some cases longer, but at the moment there is keen demand in the five to 10 year belly of the curve for corporate paper, with continued interest for long dated utility bonds.
At present, Canadian firms wanting 30 year debt may be better off in the US market, according to Patrick MacDonald, co-head of DCM at RBC in Canada.
Rogers Communications, the telecoms and cable TV group, sold $500m 10 year and $500m 30 year bonds with 3% and 4.5% coupons in February.
“Certainly, one of the reasons a Canadian issuer would look south of the border would be to take advantage of attractive pricing at 30 years and to take advantage of the depth of that market,” says MacDonald.
Rogers needs Canadian dollar proceeds, so any US issuance was probably swapped, but other Canadian firms have a natural need for US dollars.
“For the borrower the questions are, what is my most economic source of funding, what is the optimal term of my financing, and what would I need to do to bring the proceeds back into my currency of choice,” says Amery Dunn, head of US DCM and syndicate at RBC in New York. “Some of the Canadian corporates have a strong preference for US dollars because of the nature of their industries, be it commodities or mining, but in general issuers look across jurisdictions for the best funding opportunities.”