In a first for Canada, a corporate bond deal has been sold the same way share financings are, paving the way for the famously private fixed-income market to attract a new set of investors.
On Monday, CanWel Building Materials Group Ltd. sold $60-million worth of new bonds by way of a bought deal. The debt pays a 6.375-per-cent coupon and will mature in five years.
The bought deal structure is common to Canadian equity investors. Under this model, the investment banks that underwrite a share financing buy the entire deal up front, then turn around and market the stock to investors – making the banks liable for any shares that do not sell. The issuer, however, gets its money no matter what.
By contrast, the bond market has long relied on marketed offerings, in which investment banks act as sales agents. Because the proceeds are not guaranteed, the companies selling bonds may raise less money than they hoped for if investors scoff at their deals.
Because the fixed-income world has relied on the marketed model for many decades, the switch to a bought deal marks a rather major milestone.
CanWel’s new bonds will also be listed on the Toronto Stock Exchange – another rarity for this market. Debt typically trades “over-the-counter,” which means bond prices are set by private brokers, usually working for banks, making the fixed-income market rather opaque. The bonds are slated to begin trading after the deal closes on Oct. 9.
By adopting the bought-deal model, CanWel hopes to open itself up to retail investors who rarely dabble in fixed-income. Bond offerings are normally dominated by large institutions, such as insurers and pension funds who get first dibs on new offerings. “Retail is always shut out of these issues and they always ask, ‘How can we get in?’" said Sean St. John, head of fixed income at National Bank Financial, which led CanWel’s bond sale.
Even though they’ve rarely gotten their hands on bonds in the past, retail investors are expected to be a source of ample demand for high-yield issues because interest rates remain historically low. “We see the need for yield all day long," Mr. St. John added.
However, there is the risk that by trading on the TSX, this type of debt could fall into the hands of small-fry investors who may not understand the risk associated with high-yield bonds. (In short, they come with a higher risk of default.)
As for corporate issuers, there is hope the bought deal structure will allow more of them to sell debt. Until now, small-to-mid-cap companies looking to raise money have been forced to choose between issuing equity and selling convertible debt, which can be converted to shares. High-yield debt issues such as CanWel’s usually require a minimum size of $150-million, to make them liquid enough to trade on the over-the-counter market.
By opening up to retail investors, however, smaller companies should have another way to meet their financing needs, because the institutional investors that normally demand the larger deal sizes will not call the shots. At the same time, investment banks are more likely to step up to underwrite these issues because liabilities of between $60-million and $75-million are much easier for their risk committees to swallow.
Tim Kiladze