Livingston coupon seen coming a little lower; corporate bonds little changed; FOMC eyed

By Rebecca Melvin

New York, Nov. 1 - Livingston International Inc.'s planned C$135 million offering of five-year bonds launched Monday after last week's roadshow, and pricing was expected to be successfully completed late Monday or Tuesday with a 10.125% to 10.25% coupon, market sources said.

Pricing of an unrated piece of paper like Livingston was said to mark a first for Canada, which typically hasn't been open to unrated issues, market sources said.

Elsewhere in the secondary market, trading was light, and pricing was unchanged, sources said.

"This week it's all about the Fed on Wednesday and the size, schedule and frequency of QE2 purchases. There are a number of deals in the works as we come into year-end and a fairly large coupon and maturity month in December. So November should be active with issuance and money put into the market," said Mark Wisniewski, a portfolio manager with Toronto-based Gluskin Sheff + Associates Inc.

That said, the Canadian corporate bond market has seen some good two-way flow in recent weeks related primarily to new issuance from the banks as they approached the end of their fiscal year on Oct. 31.

There were four bank issues that came at the end of October, and that stimulated some pockets of trade, as investors eyed value opportunities and changed out some of the older, vintage bank debt and into the new paper.

Royal Bank of Canada, CIBC, TD and Laurentian were the banks that came with $5 billion in subdebt deals.

Strong expectations for new issuance as the calendar changed to autumn from summer didn't materialize, and cash that has been set aside to participate in the new issue pipeline that didn't materialize began to build up.

A lot of the secondary market activity in October was a result of strong fund flows going into the corporate markets because investors couldn't wait any longer for new issues, a sellsider explained.

"Those bank deals soaked up a fair amount of money," the sellsider said.

In government debt, the yield on Canada's 10-year notes climbed 2 basis points to 2.83%, after rising 5 bps last month. The price of the 3.5% bonds fell 19 cents to C$105.61.

Canada to sell five-years

Canada will sell C$3.5 billion of five-year bonds at auction on Wednesday. The bonds will mature in June 2016. The previous auction of five-year bonds on Aug. 18 drew an average yield of 2.26% with a bid to cover ratio of 2.25 times.

There is a lull in data in Canada and in the United States, and in the absence of any new information Monday and Tuesday, trading in Treasuries was expected to be choppy, Kam Bath, fixed income strategist with RBC Capital Markets, said.

Canada underperformed in Treasuries across the curve, Bath said.

"Treasuries are firmer in the belly of the curve, and there could be squaring up of positions as the market keeps seeking direction and expects to get it on Wednesday," Bath said.

Demand for the Bank of Canada auction of five-year paper on Wednesday is expected to be good, but it will be complicated given that the Canadian auction is expected to be held Wednesday at noon ET, and the Federal Reserve's decision on the quantitative easing program is expected two hours later at 2:15 p.m. ET.

There will be an inclination to want to hold off until the Fed decision, so it's going to be "tricky," Bath said.

"You could see a bit of a tail...but we expect strong demand," he said.

"People are following that, and there is little to grab the market's attention before that," he said.

Livingston represents a first

The coupon on Livingston's C$135 million bond offering was looking to be set lower than originally thought at 10.125% to 10.25%, according to market sources.

Livingston, an unrated high-yield credit, was heard last week pricing the debt with a coupon of 10.5% to 10.75%.

"They adjusted some of the covenants, and that's why the coupon is lower," a Toronto-based portfolio manager said.

Livingston is a leading North producer of customer brokerage and transportation logistics services based in Toronto.

Investors were hoping to get it cheaper because the company is unrated.

The paper, which has a five-year maturity and is non-callable for three years, is the first unrated issue to come into the market in Canada, but response has been favorable and sources anticipate that the deal was going to get done successfully.

CIBC and RBC Capital Markets are joint bookrunners of the issue that was seen pricing late Monday or on Tuesday.

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