British Columbia reopens long bonds; Vermilion readies sale; preferred deals seen as trend

By Cristal Cody

Prospect News, Feb. 2 - The Canadian bond markets slowed considerably on Wednesday after Tuesday's merry-go-round of deals.

In the lone new supply, the Province of British Columbia sold C$500 million in a reopening of its 4.3% bonds due 2042.

The winter storms affecting Canada and much of the United States may be impacting issuance, while the situation in Egypt grew more worrisome on Wednesday, sources said. Meanwhile, the Chinese New Year is Thursday.

Issuance though is not expected to dry up.

"There're a couple of roadshows happening this week," a source said. "Issuers are going to continue to pick away at stuff."

Calgary, Alta.-based oil and gas producer Vermilion Energy Inc.'s roadshow for C$200 million five-year senior notes (DBRS: BB) is under way with pricing expected on Thursday, a source said.

Scotia Capital Inc. and CIBC World Markets Inc. are the lead managers.

Elsewhere, the preferred stock deals that GMP Capital Inc. and RONA Inc. sold the previous day have some market observers wondering if there's a trend developing for "non-financial, lower-rate corporates tapping the preferred market," a source said.

RONA upsized its offering of series 6 class A 5.25% cumulative rate reset five-year preferred shares (/P-3/DBRS: Pfd-3) to C$150 million from C$125 million on Tuesday. The Boucherville, Quebec-based RONA is Canada's largest hardware and gardening retailer and distributor.

GMP Capital sold C$100 million of five-year series B cumulative rate reset preferred shares that yield 5.5%. Toronto-based GMP Capital is a leading independent Canadian investment dealer.

The deals show "another sign of the strong demand for yield," the source said.

In January, RioCan Real Estate Investment Trust, Brookfield Asset Management Inc. and First National Financial Corp. sold preferred shares in Canada.

Government bonds sink

In other market activity on Wednesday, government bonds fell in tandem with U.S. Treasuries, sending yields up. Canada's 10-year note yield rose to 3.379% from 3.33%. The yield on the two-year note rose to 1.749% from 1.72%.

Canada auctioned C$3 billion of 3.25% 10-year non-callable government bonds on Wednesday at an average yield of 3.482%.

Treasuries were lower for a third straight session. The two-year note yield rose 6 basis points to 0.66%. The 10-year benchmark note added 5 bps to 3.48%.

Payroll processor Automatic Data Processing, Inc. said U.S. private sector employment increased by 187,000 jobs in January following a revised increase of 247,000 jobs in December. Analysts had expected a rise of 140,000 jobs.

The report was released ahead of the much-anticipated Labor Department's January jobs data on Friday. On Friday, Canada's January labor data also will be released.

British Columbia reopens

The Province of British Columbia (Aaa/AAA/DBRS: AA) priced C$500 million in a reopening of its 4.3% bonds due June 18, 2042 at 97.489 to yield 4.449% on Wednesday, a source said.

The bonds were sold at a spread of 71 bps over the Government of Canada benchmark.

Scotia Capital Inc. was the lead manager.

The issue was previously reopened on Sept. 27, 2010 to sell C$500 million at an 82 bps spread. The issue now has a total outstanding of C$1.5 billion.

OPTI bonds sink

Investors continued to put pressure on OPTI Canada Inc.'s bonds a day after the company announced it had hired a third financial adviser.

"That was the big thing everybody focused on," said one market watcher. "It feels like that is heading toward some kind of restructuring."

He added that the second-lien notes had fallen into the high-40s, down from the mid-50s on Tuesday and around 60 before that.

Another trader quoted the 7 7/8% and 8¼% notes due 2014 at 47 bid, 48 offered, down from around 56 previously.

"That's a pretty big slide," he said. There was "lots of good volume too."

The Calgary, Alta.-based oil sands producer said Tuesday it had hired Lazard Freres & Co. LLC to assess its strategic alternatives. Lazard will work alongside Scotia Waterous Inc. and TD Securities Inc., which were hired as financial advisers in November 2009.

Moody's Investors Service downgraded OPTI on Wednesday, leaving its corporate family rating at Caa3 - down from Caa2 - and the second-lien notes at Ca - down from Caa3.

The outlook is negative.

Moody's said its action was due to the company's declining liquidity and "our view that the company will be unable to meet all of its cash requirements in 2011."

"We estimate that at the end of December 2010, OPTI had $175 million of cash. In 2011, cash interest will be $180 million and OPTI's share of Long Lake capex will be $150 million, with another $50 million for their share of the phase 2 SAGD site (Kinosis) possible, and we expect only breakeven to slightly positive operating cash flow from the Long Lake project," Moody's said in a statement.

The rating agency did note that OPTI's C$190 million revolving credit facility was fully available, but as it comes due in December of this year, "we do not consider it an available source of liquidity."

"The negative outlook reflects our view that OPTI's capital structure is unsustainable and will likely need to be restructured," Moody's said.

Another trader said the 7 7/8% notes and 8¼% notes, both due 2014, were "down a boatload of points," to around the 48-49 context, versus Tuesday's already depressed levels in the lower 50s.

He said that just as had been the case on Tuesday, and indeed, over the past few sessions, "there was good size again." He saw "all kinds of activity" in them, estimating a loss of at least 6 points, and probably more.

"OPTI was the big mover of the day," he declared. "It was on everybody's run, every page of offerings."

Another market participant agreed that OPTI "was the big trader today."

He opined that "there are a lot of questions [among investors] about what's going on there. The bonds have been very active over the last two weeks," calling them down 15 to 20 points total in the last week or so, "on really no news. I think a lot of people are getting the sense that the company is in kind of dire straits."

He said that operations at the oil sands joint venture in Long Lake, Alta., that is 35% owned by OPTI and 65% controlled by senior partner Nexen Inc. "aren't working as advertised, and they're having to put more money into more steam production" to get the thick, gooey bitumen crude oil out of the ground so it can be processed into the much more commercially valuable and desirable light, sweet grade of crude.

He said that "there are some credit questions going on and people have been talking about restructuring. There was some talk earlier about a dealer blowing out of a position, and that put pressure on them. I think a lot of people are just starting to take a look at the story" - and as a result, he said, the bonds had gone from levels around 72 bid at the start of the year down to current levels in the upper 40s, getting as low as 451/2-46 during Wednesday's dealings.

He said OPTI's two senior secured first-lien issues, the 9% notes due 2012 and 9¾% notes due 2013 are still trading up in the 90s, around 97 bid on the 9s and a 94-ish level on the 93/4s.

Another trader saw the 7 7/8s down over 7 points on the session, pegging them around 48¾ bid, while the 81/4s lost 8¾ points, with a last trade at 47. He said that "north of $50 million of each of those issues were trading."

Relative to junk players in the United States, he quipped that "they're up in the far north - but the bonds are definitely heading south."

Nortel trades

Among other distressed names from north of the border, a trader saw Nortel Networks Corp.'s 10¾% notes due 2016, calling them up between 2 and 2½ points on the day at 91 bid, 92 offered, on "good volume," particularly at the end of the day.

The Wall Street Journal reported on Wednesday that the Toronto-based telecommunications systems manufacturer - which filed for bankruptcy in 2009 and has been liquidating its far-flung assets one by one since then through court-supervised sales, choosing to wind down the company rather than attempt a reorganization - expects to select an initial stalking-horse bidder for a massive portfolio of some 4,000 patents, probably within three weeks. The Journal quoted unidentified sources said to be familiar with the situation that among the pool of at least five potential buyers are such high-tech heavyweights as Apple Inc. and Google Inc.

The patents are expected to go for at least $1 billion, with the proceeds to be distributed among Nortel's various creditors.

Catalyst inactive

A trader saw Catalyst Paper Corp.'s 11% senior secured notes due 2016 unchanged around 102½ bid, 103 offered.

He also saw the Richmond, B.C.-based paper manufacturer's 7 3/8% notes due 2014 quoted in a range between 86 and 88, "but it was just quoted there, with not much trading."

Paul Deckelman and Stephanie N. Rotondo contributed to this review

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