Pare Canadian pipeline debt, Royal Bank tells investors
Royal Bank of Canada, the nation’s largest underwriter, is recommending investors reduce holdings of pipeline companies on speculation increased infrastructure financing will drive down the value of their bonds.
Pipeline operators, which account for the most issuance among Canadian firms after banks, may see spreads widen in 2013, said Matthew Kolodzie, a credit-market analyst at RBC Capital Markets in Toronto. Canadian pipeline bonds including those of Enbridge Inc. and Trans Canada Corp., Canada’s two largest operators, are the worst performers this year among global peers issuing U.S.-dollar denominated debt, Bank of America Merrill Lynch data show. Debt sales by utilities and pipelines this year will reach a record $14 billion as spending on projects climbs to an all-time high $19 billion, Royal Bank estimates.
“There’s a fair amount of new supply coming into the market and there are going to be better opportunities for bond investors elsewhere,” Kolodzie said in an interview. Pipeline companies “had a really good run in 2012.”
Seeking to diversify their customer base, pipeline companies are expanding with new proposed routes like TransCanada’s Keystone XL to the Gulf Coast and Enbridge’s Northern Gateway to the Pacific. That will result in billions of dollars of investment in infrastructure, much of it debt, Craig Alexander, chief economist at TorontoDominion Bank, said.
Pipeline operators are experiencing a “perfect storm” of “positive” conditions with the need for new transportation routes for Canadian crude and demand for debt, said Joel Hunter, TransCanada’s vice-president of finance, in an interview. The company is considering issuing about $5 billion in debt between 2013 and 2015.
“If spreads move back out by 10 or 20 basis points it’s not going to distract us from issuing in the marketplace,” said Hunter.
Canadian pipeline bonds are the worst performers in an index of U.S.-dollar denominated debt of companies from eight countries, gaining eight per cent this year compared with an average 9.7 per cent. China’s distributors led the index with returns of 36 per cent.