Maple bonds resume as foreign entities issue debt in Canadian dollars
A favorable borrowing environment and strong investor demand are causing a resurgence of the “maple” bond market, as major banks and foreign corporations rush to issue bonds denominated in Canadian dollars to domestic institutions.
In the first three and a half months of 2021 alone, $ 8.6 billion in maple bonds were issued by foreign entities in 13 transactions, exceeding the total amount of maple bonds issued in 2020 ($ 8.1 billion) and in 2019 (4.5 billion), according to statistics provided to The Globe and Mail by the Royal Bank of Canada.
The bulk of the maple bonds issued in 2021 so far – $ 6.1 billion – have come from U.S. financial institutions selling to Canadian institutional investors. In early March, JPMorgan Chase raised $ 1.25 billion in Canadian bond markets, following a $ 1 billion hike from Goldman Sachs the previous week. Morgan Stanley and Bank of America Corp. have so far issued $ 1.6 billion worth of maple bonds in 2021.
In mid-March, Verizon Communications issued $ 1.5 billion in maple bonds as part of a US $ 25 billion global debt deal to help pay a bill for 5G spectrum licenses.
“We are certainly seeing foreign issuers attempting to take advantage of the very attractive funding costs in the Canadian bond markets right now,” said Patrick MacDonald, co-lead of the RBC debt markets team.
Activity in the maple bond market is subject to fluctuations, primarily because the foreign entities that issue these bonds generally do not keep the cash they raise in Canadian dollars – they convert it into their local currencies or into US dollars by buying a financial instrument called a swap. When the maple market momentum gains momentum, it’s often because the cost of issuing a maple bond and trading it into another currency is low.
“Foreign issuers are getting particularly good rates right now, comparable to what they would get in their home market,” said Andrew Becker, senior senior debt originator at TD Securities. That, Becker added, combined with a steady supply from hungry institutional investors looking for credit, are the two main reasons foreign companies have been keen to raise funds in Canadian dollars in recent times.
However, what is particularly unique in 2021, according to Sean Gilbert, Managing Director and Head of Canadian Debt Markets at CIBC Capital Markets, is that domestic bank bond issuance has fallen, leaving US banks to fill the void. .
“From the perspective of Canadian investors, they want diversification. So if there aren’t enough Canadian bank bonds to buy in the market, they go to US banks, ”he said. “US banks then know our market can handle size and are receptive to transactions over $ 1 billion.”
Michal Cegielski, head of debt capital markets at the Bank of Nova Scotia, agreed that the surge in maple bond issuance by U.S. banks in the first quarter of 2021 was driven in part by the need to bridge the void left by Canadian banks. “Canadian bank bond issues are about half of what they usually are at this time of year,” he said.
Historically, according to Becker, a large, successful maple bond trade often leads to a wave of follow-on trades, with issuers aware of favorable transaction prices and sizes. “It’s not uncommon for these US bank issues, for example, to come in bundles because of the momentum generated by a single raise.”
Loonie-denominated bonds were not always an attractive option for foreign companies looking to raise funds. It was not until 2005 that Ottawa removed restrictions on the ability of pension funds and retirement portfolios to invest in foreign assets, prompting these entities to diversify their holdings abroad.
Mr. MacDonald of RBC said an average of 40 to 50 institutional investors – typically Canadian pension funds, asset management divisions of banks and insurers – participate in a maple bond issue. given. “Large multinationals have a constant need to access debt, and they want to make sure that when they do increase, they have access to a large pool of investors,” he said.
Six of the issuers that entered the Canadian debt market this year were also present last year, indicating that fundamentals remain strong for maple issuers, said Gilbert of CIBC. “I certainly anticipate that more issuers will continue to consider Canadian maples, but, of course, it’s difficult for us to predict definitively as it depends on currency swap spreads and the low cost of funding.
But recent comments from the Bank of Canada signaling higher rates and a withdrawal of quantitative easing could cause headwinds in bond markets. “I don’t think it will help the maple story,” added Mr. Gilbert. “There is nothing like a slight hike in interest rates to get global issuers off the bench.”
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