The borrowing must go on -- even as a bond-market rout sends Canadian yields to a decade high.
Borrowers in the northern country pushed issuance in foreign currencies to a record US$125 billion this year after a flurry of deals on Wednesday, up from US$122.7 billion in the same period a year ago. The province of Ontario, TransCanada Corp., Algonquin Power & Utilities Corp. and Canada Pension Plan Investment Board, raised a collective US$4.85 billion in U.S. dollars, according to people familiar with the transactions.
“What a number of these entities share is a need to come to the market on an ongoing basis,” said David Stonehouse, portfolio manager at Toronto-based AGF Investments Inc., which manages about $39 billion. “CPPIB is probably the one who’s got the most discretionary profile of all of those.”
Global bond markets have slumped in recent days as investors bet on higher interest rates from the Federal Reserve and other central banks as inflation rises. One-year Libor is trading at a 10-year high of 2.96 per cent, five-year Treasuries are yielding about 3 percent after reaching the highest level in a decade this week and Canada’s 10-year government benchmark bond is trading at 2.54 per cent, near a four-year high.
Derek Holt, head of capital markets economics at Bank of Nova Scotia, said borrowers could be racing to market before yields go even higher as credit spreads have become vulnerable to adverse swings in risk appetite. It’s “all part of a longstanding effort to diversify funding across markets for some of these issuers and diversify currency exposures, maintain name awareness and reach beyond heavy reliance upon the domestic market.”
Ontario raised US$2.5 billion Wednesday selling a five-year global bond at a spread of 25 basis points over the mid-swaps rate, according to Bloomberg data. TransCanada tapped its existing 4.25 per cent coupon bond due 2028 and sold new bonds due 2049, raising US$1.4 billion. Algonquin Power sold US$200 million of subordinated debt, according to people familiar with the transactions and CPPIB, which manages $381.2 billion of assets, priced US$750 million of floating rate notes.
Since amending its borrowing plan Sept. 24, Canada’s most populous province has raised more than $8 billion of debt in six transactions, sending its total to the year to about $24.7 billion, or 70 per cent of its 2018-19 borrowing plan, according to Bloomberg News calculations based on Ontario Financing Authority’s data.
Ontario’s borrowing spree has boosted government issuance to record $105.5 billion for the year, according to data compiled by Bloomberg. National Bank of Canada and Royal Bank of Canada, which occupy the top two spots in a ranking of the arrangers in volume of deals, are hopeful they can bring more transactions to the market until the end of the year, though not at the same pace.
"So far general issuance has been ahead of schedule, with the domestic issuance being a better market," said Sean St.John, head of debt and equity capital markets at National Bank Financial. "We’ll see the pace maybe slow down a little bit going into the end of the year, but we should still close ahead of last year."
TransCanada, which gets 55 per cent of its profits in U.S. dollars, plans to use part of the proceeds to repay its existing 3.125 per cent and 7.125 per cent bonds due January 2019, said the people. Algonquin plans to use proceeds from its US$200 million subordinated debt for general corporate purposes including repaying existing debt, said the people.