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Canadian Credit Issuance May Hit Record Volume This Year

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Corporate issuance in the Canadian dollar is on pace for a record year after reaching C$31.5 billion (or $25.2 billion, in U.S. dollars) in the third quarter, the highest for that time of year.

Debut Maple bonds from Apple Inc. and McDonald’s Corp., coupled with offerings from names such as Bell Canada Inc. and Enbridge Inc., pushed sales to the highest for any quarter except the first quarter of 2015 when C$32.7 billion of bonds were sold. Four more transactions this week, including an inaugural Maple bond from the Walt Disney Co. on Tuesday, increased the year-to-date tally to C$89.5 billion, or just C$17.9 billion short of the record set in 2013.

Issuers are keen on moving early to lock in lower financing costs as the Bank of Canada debates further policy moves. The central bank already increased borrowing costs twice this year. The flurry of bond offerings is getting a warm reception from local investors who eagerly accept larger tranches of securities as volatility in markets remains low, increasing the appeal of corporate bonds.

“Issuers are very comfortable with the market, as it’s able to absorb larger deals” than usual, said Randall Malcolm, managing director at Sun Life Investment Management in Toronto which has about C$37 billion in Canadian fixed income. “If you have banks step up and a couple more maples, there’s a potential for a new record for issuance.”

(Related: High-Grade U.S. Bonds Run at Fastest Pace Ever Past $1 Trillion)

“The issues have not choked the market and the deals have been performing reasonably well, which tells me there’s certainly a lot of cash lying around,” said Andy Kochar, a Toronto-based fund manager at AGF Management Ltd., who helps oversee C$6 billion. “As long as the deals are being priced appropriately, I don’t see any reason why issuance can’t continue.”

That appears to be the view that’s shared by syndicate desks at banks. Two deals hit the market on Monday, usually a quieter day for issuance in Canada, with AltaGas Ltd. pricing C$450 million of securities in a two-tranche offering and Eagle Credit Card Trust’s C$250 million of notes backed by credit-card receivables. Two more were priced Tuesday: a C$1.25 billion seven-year Maple bond from Disney and a two-tranche C$600 million offering from Toyota Credit Canada Inc.

Apple Leads

A rise in government bond yields triggered by interest-rate increases last quarter has increased the returns for corporate bond investors. At the same time, the CBOE Volatility Index posted its longest streak of quarterly drops since 2011 and may be in for a quiet end to the year, if history is any guide.

“That’s the environment in which there’s demand for income and credit product and that can continue into the fourth quarter” said Andrew Torres, founder and chief executive officer at Toronto-based Lawrence Park Asset Management. “The Canadian market this quarter demonstrated that you can get the size done.”

Apple sold C$2.5 billion of bonds in August, which was the largest non-financial bond sale in Canada. McDonald’s sold C$1 billion of bonds, while Bell priced C$1.5 billion in two tranches last week.

Last month BMO priced C$1.75 billion of deposit notes, raising the presence of Canadian banks in the local market. Banks, which have traditionally dominated Canadian dollar issuance, have been more frequent issuers abroad rather than domestically this year.

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