Canadian firms open foreign debt taps

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The number of Canadian firms tapping foreign debt markets went up last year, a trend that is expected to continue as more companies expand globally.

Several of the country's largest financial firms, telecom giants and even provincial governments looked abroad to finance their debt in 2016 – some for the first time. There were 181 cross-border debt deals by Canadian corporations into foreign markets last year, worth $144-billion including self-funded debt, data from Thomson Reuters show. By either measure, this was the highest volume in a decade.

And the cross-border debt trend is gathering momentum; sales of U.S.-dollar corporate bonds from Canadian issuers have been brisk so far in 2017. A scan of the corporate horizon reveals a wide range of reasons for this international financing push.

"Investors are taking a global view," said Richard Sibthorpe, head of global debt capital markets at BMO Nesbitt Burns. "And as you look at the theme of how we're aligning ourselves, we're taking a global view as well in terms of how we're developing our platform in the U.S., whether it be on the debt side, M&A or what have you."

In M&A, executives are often driven by the pursuit of scale, industry consolidations and cheap debt. But when it comes to issuing bonds, there are a few extra motivating factors.

Manulife Financial Corp. tapped Asia for the first time in Singapore in 2016, with a subordinated debt issuance that raised $500-million Singapore dollars (about $470-million Canadian). The move was part of the insurer's strategy to diversify funding sources and to broaden its investor base. It also went back to the U.S. market for the first time in six years. Altogether, the insurer raised $5.3-billion in debt and preferred share financing in 2016.

The momentum continued in February, when the company wrapped up its U.S. market sale offering of $750-million (U.S.) in subordinated notes, a security with a lesser claim on the company's assets than secured, senior debt. The notes come due in 2032 and pay a coupon of 4.061 per cent. This last issuance held appeal for Manulife because of its eligibility to be counted as regulatory capital, which insurers must hold to protect against risk.

"We saw the opportunity to access the U.S. markets on a cost-effective basis," said Halina von dem Hagen, Manulife's executive vice president of treasury and capital management.

For companies such as Fortis Inc. and Emera Inc., which issued their first rounds of U.S.-dollar bonds, the impetus to head south was clearer: the acquisition of U.S. companies. That was a motivator for many non-bank corporate issuers, as Canadian takeovers abroad hit new highs last year. A change in the pace of those tie-ups would likely contribute to volatility in issuance levels.

Other companies are driven almost exclusively by pricing, such as Rogers Communications Inc., which has a long history of issuing debt of varying degrees of quality in the United States and Canada, including a $500-million (U.S.) offering of senior notes last fall. The company monitors pricing in various markets on a weekly basis and can move quickly to issue new debt. Telus Corp., which did its first $600-million (U.S.) issuance in the United States last year, was also motivated in part by the opportunity to get slightly better pricing in the United States than it could find in Canada, several bankers noted, though conditions are now swinging back in Canada's favour.

The trend of cross-border debt was also pronounced among government issuers last year, said Rob Brown, co-head of debt capital markets at RBC Dominion Securities. Several provinces looked to the U.S. dollar, British sterling and Euro markets, reducing their reliance on the Canadian market and embracing foreign investor demand.

Canadian governments recorded their highest number of cross-border debt issuances in a decade in 2016, raising more than $30.6-billion (Canadian), according to figures compiled by Thomson Reuters. Those figures include national and provincial governments, a well as state-owned groups such as Export Development Canada.

As for their motivation, governments tend to be especially price-sensitive when doing offshore deals, Mr. Brown said, pointing to the Province of Alberta's inaugural dip into the British bond market with a £650-million ($1.07-billion) transaction this year as one example.

"It was competitive relative to Canadian domestic levels, and then at the same time offered them diversity of funding in an environment where their funding needs are increasing year-over-year," said Mr. Brown. "So we expect to see more of that, and that to be sustained going forward – and more predictable than offshore issuance in the corporate market, which tends to be more situation specific and event driven."

BMO's Mr. Sibthorpe expects debt financing volumes in the corporate space will also stay high through the coming year, pointing to financial firms and pipeline energy infrastructure companies as potentially busy groups.

"We expect next year to be very active again at similar levels to what we have seen this past year in Canada," he said.