Toronto bank towers and skyline.Moe Doiron/The Globe and Mail
Canadian companies are borrowing more than ever, breaking records for selling new debt in a push to lock in low interest rates before borrowing costs rise.
Corporations and financial institutions have set a new mark for fixed-income sales this year by issuing more than $100-billion in debt, higher than the full-year record set in 2012.
The sales surge comes in a year characterized by volatile bond markets and expectations of a "great rotation" by investors out of debt and into equity. Through it all, bond sales have kept up, surprising everyone from corporate treasurers to investment banks. Debt issues have been particularly hot in November, with $4.5-billion raised last week from Bank of Nova Scotia and a unit of Canadian Utilities Ltd., among others. That trend continued on Tuesday, with Toyota Motor Corp.'s Canadian finance arm borrowing new funds.
The latest surge in investor interest in corporate bonds comes after the Bank of Canada altered its expectations of a rate hike, convincing investors that its benchmark rate would stay low for longer. The central bank's new position and the absence of inflation have sent the yields on government bonds lower, reducing the cost for other borrowers, including corporations. The U.S. Federal Reserve Board's reluctance to pull back or "taper" its bond-purchasing program has also had an effect.
"Since we know that the Fed likely won't taper before December, and even probably before next year, and that [the Bank of Canada] probably won't increase rates, there's a rush back into the market," said Desjardins Securities fixed-income strategist Jean-François Godin.
While the flurry of activity is warranted, it still comes as a reversal from the market trend during the summer.
When investors began to fear that the Fed would slow its massive bond-buying program, which serves as a form of economic stimulus, they started dumping government bonds, sending benchmark yields soaring. (Bond prices and yields always move in opposite directions.) The tidal wave swept through Canada and, from early May to early September, the federal government's 10-year benchmark saw its yield soar by more than a full percentage point, to 2.82 per cent from 1.67 per cent.
That sudden shock has since subsided. The Canadian 10-year yield now sits at 2.65 per cent. This drop opened a window for corporate issuers.
The wave of borrowing is propelled by thirsty institutional investors that are sitting on money that is ready to be deployed. "There's still a lot of cash on the sidelines, and we continue to see cash put to work in credit markets," said Susan Rimmer, managing director of fixed-income at CIBC World Markets. Institutional demand "has been remarkably robust," she added.
It also helps that provincial bond spreads, or the difference between yields on federal government and provincial bonds, are at their lowest point in a year. Investors who are looking for better returns are suddenly eyeing corporate debt, whose spreads haven't collapsed to the same extent.
By many metrics – from the VIX, a measure of market volatility, to corporate earnings – there do not seem to be many reasons for investors to be scared right now, so they are willing to take a chance on corporate debt that is a bit riskier than equivalent bonds issued by governments.
As usual, Canadian banks dominate bond sales this year, raising $47-billion, up 23 per cent from 2012, according to CIBC. However, non-bank borrowers have increased their game, raising an usually large amount of debt, helping to push total issuance to sky-high levels.
Retail borrowing showed the biggest jump this year, climbing 278 per cent to $4.3-billion, propelled by companies such as Sobeys Inc., which needed the money to fund its acquisition of Safeway Canada. Real estate has also been a bright spot, up 81 per cent. Acquisitions explain part of the debt surge, but much of the new debt is going toward refinancing existing debt to take advantage of lower rates.
Despite the records, there are still 61/2 weeks left in the calendar year, and advisers say there are sure to be more deals. Dec. 1, for instance, is a big day for coupon payments from existing bonds, and investors often like to reinvest some of that money into new debt.
Tim Kiladze