Canadian companies busy issuing new bonds

Canadian companies are on track to sell a record volume of bonds in their own currency this year, taking advantage of low rates to refinance and fund post-pandemic investments.

Almost $78 billion has been issued already this year, more than 70 per cent of the record $111 billion sold in all of 2020, according to data compiled by Bloomberg. Bankers expect a new high, despite a slower pace through year-end as borrowers shift from stockpiling liquidity to rightsizing balance sheets and protecting ratings.

“We are on a good path to exceeding the record highs that we've seen in the Canadian market,” said Rob Brown, co-head of Canadian debt capital markets at Royal Bank of Canada, one of the top underwriters of the debt.

The second half of the year is typically less busy than the first in Canadian-dollar corporate issuance, partly due to holidays. This year's slowdown is expected to be aggravated by fatigue stemming from the brisk start to 2021 and the fact that most market participants are still working from home.

“Our pipeline is thinner than it was,” said Brown. Refinancing needs may be smaller, but high-yield and ESG financing should continue gaining traction in the second half, while funding for investments like 5G spectrum for telecoms may boost volumes, he said.

“Funding costs are still very attractive and, to the extent we do see a little bit of a slowdown that will help the technical picture, will support credit spreads, and that will likely encourage issuers to look to access to market,” said Brown.

The yield on the Bloomberg Barclays Canada Corporate Bond index has been in a 2.04 per cent to 2.18 per cent range since mid-March, with an increase in government yields offset by tighter spreads.

“Credit spreads will likely grind sideways throughout the summer with a chance of spreads widening towards the end of the year,” said Sue McNamara, senior vice-president at Beutel Goodman & Co.

McNamara is watching how companies use the strong free cash flow they're accumulating. “Will they show discipline and de-lever, or will they use it for share buybacks and dividend increases,” said McNamara, adding that increased merger and acquisition activity warrants caution.

There's at least $197 billion of pending or completed M&A deals involving Canadian companies using cash or financing, up from $167 billion last year, according to data compiled by Bloomberg. Among the largest deals, Rogers Communications Inc. agreed to buy smaller rival Shaw Communications, and Brookfield Infrastructure Partners LP made a hostile bid for Inter Pipeline Ltd. that could derail a friendly all-stock offer from Pembina Pipeline Corp.