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Derivatives

A sweet future in store for Maple market

The investor base for Maple bonds is growing, more corporate issuers are keen to visit Canada and even the yield curve is extending. Nathan Collins looks at the Maple market as it tries to shake off a reputation for illiquidity and FIG dominance.

With C$3.35bn printed so far, 2013 has already seen the second highest volume issued in the Maple market since 2007. While there is still a way to go to top the C$4.4bn of Maple bonds sold in 2012, it is by no means an unachievable target, with syndicate bankers hoping for a busy close to the year. The final four months of 2012 saw C$2.4bn of issuance and the closing months of the year often prove the busiest, both in the Maple and domestic Canadian market, according to syndicate managers.

“We had a loose target of C$4bn-C$6bn of issuance,” says Ian White, vice president in debt products at Bank of Montreal. “We’re on target to exceed that at the moment and the market mood is constructive. Looking at Maple issuance in previous years September is often very busy and this carries through to the end of the year.”

Even if year-to-date volumes fail to improve on 2012, they are still encouraging and there have been a number of developments that are leaving Maple syndicate bankers feeling very confident for the future.

Extending duration

One trend that bankers have picked up on in 2013 is a growing bid for long dated paper. The Maple market has traditionally been centred on bonds with a five year tenor. While five year notes have by no means fallen out of favour investors are willing to look a little further along the curve for the right issuer.

“We’ve seen two trends this year — deals have got bigger and the maturities have got longer,” says Michal Cegielski, director in debt capital markets at Bank of Montreal. “This year we’ve seen two big 10 year deals. Investors like the extra yield on offer with a longer maturity, though obviously not any issuer is going to be able to do a 10 year Maple. Investors really have to be comfortable with the name.” 

Belgian brewer Anheuser-Busch InBev was one such issuer, selling a hefty C$1.2bn in the first month of the year, split equally between five and 10 year tranches. BHP Billiton proved that AB InBev’s trade wasn’t just a one-off when it sold C$750m of 10 year bonds in May.

The extra maturity on offer isn’t the only thing that is increasing issuers’ attraction of the Maple market. The growing size of deals is encouraging more to spend two or three days making the trip to Canada to meet investors face to face — an element of the process that most debt capital market bankers deem essential.

“A few years ago an issuer would ask what size bond they could expect to issue on the Maple market and I’d have to look down and tell them they could sell C$300m or so,” says one DCM banker. “Now I can look issuers in the eye and tell them they can be confident of a C$500m or C$750m deal. A deal that size is what justifies the work they have to put into a roadshow and that’s what’s really changed over the last 18 months.”

More liquidity

Maple bonds have suffered from a reputation for illiquidity in large part because of the predominance of financial institutions in the market in the days before the global financial crisis.

“I’ve had investors ask why they should buy Maples when they lost money on them in the past,” says a Maple DCM banker. “The problem isn’t that they bought Maples, it’s that they bought Bradford & Bingley or Bear Stearns or Lehman Brothers.”

However, the Maple market as it stands today is a very different beast to its pre-crisis days. Corporates make up an increasingly large share of issuance, which bankers say should lead to a more robust and healthy market. In 2007 — the Maple market’s peak — less than 1% of Maple bonds came from corporates, but over 2012 and 2013 corporate bonds have accounted for slightly over 60% of new issuance. 

Canadian investors remain keen to see new corporate issuers in Maple format, largely for the diversification they offer. While corporate Maple issuers tend to have bonds in a number of other currencies before selling Canadian dollar denominated debt, Canadian investors have a natural preference for picking up paper in their own currency. But investors remain wary of issuers that do not already have established liquid curves in other currencies, meaning the Maple market is likely to remain fertile ground for only veteran borrowers.

“Investors continue to look for attractive diversification opportunities into new names with demand highly dependent on the borrower’s domicile, sector, credit ratings and regulatory landscape,” says Patrick MacDonald, co-head of Canadian debt capital markets at Royal Bank of Canada. “Well recognised corporates with solid financials and operating performance continue to be well received.  Having said that, investor marketing is still a critical ingredient in gaining access to the Maple market — a simple one or two day roadshow goes a very long way.”

But Maple investors are a demanding bunch. Savvy Canadian investors baulk at any signs of an issuer looking to take advantage of cross-currency arbitrage, demanding that a deal be priced in line with the issuer’s other funding currency. Fortunately issuers seem willing to accommodate them in a bid to diversify their funding base and help to develop the market reach maturity.

“Issuers aren’t looking at the Maple market for opportunistic arbitrage,” says MacDonald. “Rather, they are increasingly recognising Canada is a deep, efficient and rational market that provides issuers with cost-effective funding diversification, an opportunity to expand their global investor base and a very straightforward documentation process that allows for expedient market access.”

Broader base

The Maple market has also benefited from a change in attitude towards the structure of syndicate groups. Pre-crisis Maple deals tended to have less involvement from the larger Canadian banks, relying more on international institutions that were less familiar with the local market.

“Trades coming to market post-crisis tend to have syndicates with several of the larger Canadian banks involved in a meaningful way,” says Andrew Ryde, head of European DCM at CIBC. “This gives investors the comfort they need that there will be liquidity in the secondary market and that they will be able to go to a number of banks to get a price. In terms of liquidity, it is also worth noting that most deals are now much more broadly distributed, several of the recent corporate Maples have been placed with upwards of 50 accounts — more like domestic deals.”

MetLife — a fairly regular issuer of Maples — sold a C$300m seven year bond in July that attracted interest from around 40 accounts. Just a year or two ago the issuer would have considered itself lucky to see 25 investors participate, according to a syndicate banker involved with the deal.

Bankers in the Maple market are keen to shake the format’s reputation as being something of a fair-weather friend, only open when the climate is favourable. For example, BHP Billiton was able to secure strong demand at a tricky maturity in an environment that was not particularly conducive to success for miners. 

“In general, Canadian investors are willing to do the necessary analytical work and will support a new issue if the credit makes sense and if the relative value is fair,” says CIBC’s Ryde. 

“The BHP Billiton roadshow coincided with the start of a sharp sell-off in commodity markets, but investors still took part in large numbers. They were willing to look beyond the short term volatility to the underlying strength of the credit.”

That’s not to say that investors will buy anything — issuers from the eurozone’s troubled periphery are likely to have a tricky time appealing to Canadian investors but it isn’t an insurmountable obstacle, says one syndicate official.

SSAs resurgence unlikely

While several SSA issuers have been able to bring successful Canadian dollar denominated deals this year, not a single one has tapped the Maple market, opting instead for international deals. Indeed, there has been only one Maple bond sold by a public sector issuer since 2007, when Norway’s Kommunalbanken sold a 10 year bond in 2011.

International investors are keen to diversify the currency mix of their holdings of SSA debt, however it remains tricky for issuers to agree with domestic accounts on pricing. Canadian investors are spoiled for choice with high volumes of issuance from domestic public sector entities — provinces, particularly Ontario and Quebec, are frequent issuers as is the Canada Housing Trust. 

“Investors are very comfortable with provinces and Canada Mortgage Bonds, these are very safe and liquid investments,” said Andrew Hainsworth, managing director in debt capital markets at Bank of Montreal. “A domestic investor looks at a supranational borrowing in Canadian dollars and wants a yield pick-up over local issuers to make up for the reduced liquidity. At the same time, these borrowers will generally price inside of Canadian issuers in other markets and want to do the same in Canadian dollars.”

With Canadian dollar deals from SSAs proving popular with offshore investors — KfW was able to sell C$1bn of five year paper in June — there seems little reason for issuers to meet the pricing demands of domestic investors and the Maple market is likely to remain restricted to private sector issuers.  

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