Hydro-Quebec notes firm; Cara Operations, Newalta mixed in trading but up since issuance

By Cristal Cody

Prospect News, June 24 - Canadian bonds saw a general improved market tone, though trading was mostly quiet on Friday, informed sources said.

Montreal-based Hydro-Quebec's $1 billion deal firmed in the secondary market, while high-yield bonds traded mostly flat.

Cara Operations Ltd.'s 9 1/8% notes due Dec. 1, 2015 rose a quarter in trading on Friday and have traded stronger since the notes priced in November.

Newalta Corp.'s notes, also sold in November, traded slightly lower on Friday but also much stronger since the original issue price.

Investors also paid attention to Sino-Forest Corp. again, as Paulson & Co. founder John Paulson attempted to explain his investment rationale. Paulson was - up until late last week - Sino-Forest's largest shareholder, until the fund began divesting its holdings.

Canadian government bonds rallied on the short end of the curve ahead of the austerity package vote in Greece and on domestic issues.

"There's been a very strong safe haven rally in the market in Canada," one bond source said. "We're continuing to price out the possibility of the Bank of Canada raising rates this year and the Bank of Canada governor is sounding a little more dovish. That and the events in Europe have driven a pretty decent rally again."

Canada's two-year note yield fell to 1.39% from 1.45%, and the 10-year note yield dropped 5 basis points to 2.86% on the day. The 30-year bond yield fell 2 bps to 3.36%.

Cara stronger

Cara Operations' senior secured second-lien guaranteed notes due 2015 priced last year moved slightly higher in the secondary market, a source said Friday.

The notes (DBRS: B//BB-/) were quoted at 103.75 bid, 104.75 offered, up from 103.50 bid, 104.50 offered the previous day, according to the bond source.

The company sold C$200 million of the notes at par on Nov. 24, 2010.

Vaughan, Ont.-based Cara Operations is the largest full-service restaurant operator in Canada.

Newalta holds

Newalta's 7 5/8% senor notes due Nov. 23, 2017 (B1/BB) fell slightly in trading on Friday to 104.5 bid, 105.5 offered from 104.75 bid, 105.75 offered on Thursday, according to an informed bond source.

The company sold C$125 million of the notes at par on Nov. 18.

Newalta is a Calgary, Alta.-based industrial waste management and environmental services company.

Hydro-Quebec firms

In other trading, Hydro-Quebec's notes were seen active early in the day, according to a trader.

The company sold $1 billion of 2% global five-year notes (Aa2/A+) at a spread of Treasuries plus 55.65 bps on Thursday.

The notes were seen "offered today at 53" basis points, the trader said.

The government-owned generator and distributor of electric power is based in Montreal.

Sino-Forest ends mixed

Sino-Forest's 6¼% notes due 2017 headed into higher territory Friday, as hedge fund giant Paulson defended his decision to invest in the Chinese-Canadian-based timber products company.

One trader said the paper was "a good bit better," trading around 50. He called that up 6 to 7 points.

Another trader said the issue popped up over 3 points to around 48. The 10¼% notes due 2014, however, were deemed a point weaker at around 51.

"Weird," he said. "Don't know what to make of that."

In a letter to investors, Paulson said that losses tied to Sino-Forest hit about $574 million so far this year. Earlier in the week, the fund reported that it was divesting its stake in the company.

Although the losses were hefty, Paulson claimed that the decision to invest in Sino-Forest was made only after "considerable due diligence." The recent decision to unload the stake was due to the belief that the stock will "remain depressed for an extended period of time, even if the investigation clears management."

Sino-Forest began tanking earlier in the month, following the release of a report by Muddy Waters Research, a Hong Kong-based company founded by known short-seller Carson Block. In the report, Muddy waters alleged that Sino-Forest had overstated its land holdings and also pointed to other wonky accounting issues that eventually led the firm to cry fraud.

Though Sino-Forest has vehemently denied any wrongdoing, the stock has tumbled significantly and the bonds have gyrated all over the map.

Stephanie N. Rotondo contributed to this review

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