Outlook 2012: Canadian primary activity forecast on par with 2011; Europe 'wild card'

By Cristal Cody

Prospect News, Dec. 30 - Canadian corporate and provincial issuers kept on track or higher with the previous year's deal levels, while issuers also turned to other markets such as the United States to price bonds over 2011.

The trends are expected to continue in 2012 with deal activity forecast to ramp up in the first three months.

"This year is very strong and we expect next year's issuance to be in line with this year," a corporate bond source said.

The corporate market, which includes high-grade and high-yield deals, saw more than C$135 billion of issuance in 2011, according to data gathered by Prospect News.

"We had a very busy first quarter and somewhat busy second quarter but Q3 and part of Q4 was very quiet this year," a bond source said. "Issuance picked up at the end of the Q4 with corporate issuance on lower rates and a little bit of stability at the end of the year."

About 200 high-grade and high-yield corporate issues, not including bank deposit notes, were brought to market over the past year, about 25 less than in 2010, one syndicate source said.

Canadian issuers also sold more than C$80 billion of bonds in other countries, such as the United States and Australia. A record 25% of all U.S. bond sales were from foreign companies, with issuers from Canada ranking as the second top country to sell bonds in the market, according to Dealogic.

The maple bond market, where foreign issuers sell bonds in Canada, totaled nearly C$8 billion over the year.

"Not quite the total investment-grade space we saw in 2010, but given the market volatility and periods where the markets were virtually closed, it was a rather decent year," another bond source said. "In 2012, I would say we're going to have to learn to live with volatility."

Fears over whether European countries would default on sovereign debt impacted markets over the last half of the year and are expected to play a major role in activity going forward.

A Canadian market analyst said the outlook for the bond markets is uncertain since "Europe remains the wild card. All the risk right now is political."

Maturities approaching

Bond issuance is expected to stay strong in 2012 with about C$20 billion of corporate maturities due next year, one bond source said.

"There's a lot of cash in the market and we have estimates of over C$200 billion of redemptions, including government bonds, provincial bonds [and] muni bonds next year for fixed income," the source said. "And we've seen increased flows into fixed income bonds, so they definitely do have a lot of cash to put to work."

In addition, "some traditionally larger companies announced some large funding programs for next year," the source said. "We expect those companies to really pick up their issuance next year."

One issuer expected to ramp up new offerings is Hydro One Inc.

"Last year, they [Hydro One] issued almost C$1.5 billion," a syndicate source said. "This year the issuance has been reduced to about C$600 million due to reduced requirements and a ton of cash on hand. They announced a large funding program so we expect them to come back next year with strong issuance volumes."

The telecom sector also is expected to be active in 2012 with larger borrowing programs, a bond source said.

"We think next year will still be robust," the source said. "Underlying interest rates have hit historical lows. Despite widening in credit spreads, yields have come in significantly and that provides very attractive all-in corporate rates for corporate borrowers. We'll see opportunistic borrowing going forward."

Public, private supply eyed

Lower issuance is expected in the investment-grade public private partnership infrastructure, often used to finance hospitals, a syndicate source said.

About 10 such deals priced in Canada in 2011 under the structure, including from the Plenary Health Care Partnerships Humber LP, which raised more than C$1 billion of bonds (/A/DBRS: A) in three tranches on Sept. 20.

"Deals like that take about a year to get approved," a source said. "We expect lower issuance next year but we do expect the pipeline to build up."

High-yield market sets record

Canada's high-yield market saw a record number of bond offerings in 2011, and forecasts call for strong primary activity in 2012.

Last year, the space saw 21 junk bond deals totaling about C$4.3 billion, up from 14 offerings totaling C$3.4 billion in 2010. In 2009, the high-yield market in Canada had four bond deals.

"It was a record year in Canada with a lot of that done in the first half of the year," a high-yield syndicate source said.

Out of the 21 deals, eight bond sales were from oil and gas-related issuers that included Savanna Energy Services Corp. in May, Videotron Ltd. in June and Precision Drilling Corp. in March.

"That was the most popular product class," a source said.

One source said a high-yield deal already is in the works for the first part of the year.

"We've got a deal we hope to launch in late January or early February," the source said. "We think there's a market for it. We all hope we come back in January with at least a more positive tone in the market."

Maple market sizzles, fizzles

Canada's maple bond market made a return in 2011 with 10 deals from foreign issuers such as Korea Gas Corp. (A1/A/A+) choosing to price bonds in Canadian dollars.

"A lot of the Canadian participants wanted the maple market to come back in 2011, and issuance was relatively robust this year versus the past couple of years," a syndicate source said. "This year, it was primarily driven by the financial issuers. What will be interesting is if next year there are any corporate multinational maple borrowers that access the maple market - that would really reopen the market."

April was a busy month for maple deals.

Goldman Sachs Group, Inc. (A1/A/DBRS: A) sold C$500 million of 5% senior maple bonds due May 3, 2018, Australia and New Zealand Banking Group Ltd. sold C$250 million of 4% maple bonds due April 28, 2016 (Aa1/AA) and Lloyds TSB Bank plc (Aa3/A+/DBRS: AA) priced C$500 million of 5.28% senior maple bonds due April 19, 2016.

The volatility in the global market over Europe curbed maple issuance in the last part of 2011.

"As the crisis hit, the maple market became very unfavorable," the source said. "Before the crisis, the maple market used to be a large chunk."

Strong provincial supply seen

The environment circling around persistent debt fears from Europe in 2011 was challenging for all financial markets, including the provincial space.

"But when you look back on 2011, what you'll see is a picture of the government sector that continued to have very little difficulty funding an exceptionally large borrowing program," a provincial bond source said. "That speaks to the investor confidence that provincial governments continue to enjoy."

Data gathered by Prospect News shows more than C$55 billion of domestic provincial issuance in the fiscal year started April 1, 2011 through December.

Provincial issuance is up slightly from the previous year, but one important development has been the "increasing reliance on the Canadian dollar market," the source said.

"Overall, we had continued reliance on the U.S. dollar market, but an even greater emphasis on Canadian dollar funding, which traditionally has been the bread and butter for provincial issuers," the source said.

Provinces such as Ontario and Quebec brought deals in the U.S. high-grade market over the year.

"Provincial issuers have witnessed a strong demand for their paper in the domestic market from investors in the long end and international accounts that want Canadian dollar exposure," a source said.

Moody's Investors Service's Dec. 15 credit outlook drop to negative on the Province of Ontario's debt rating is not expected to impact the province's borrowing schedule, a source said.

The province, which has about C$190 billon of outstanding debt, is rated Aa1 by Moody's, AA- by Standard & Poor's and AA by DBRS.

Looking ahead, provincial bond offerings are expected to stay on track with 2011, according to sources.

"I don't think we're going to see much in the way of a pullback in provincial supply," one source said. "There will be some progress on deficits, but in the coming years, we will see greater refinancing requirements for more maturities due that will hold provincial issuance at elevated levels."

Forecasts call for about C$75 billion of provincial issuance in all markets and currencies in the next fiscal year, with the lion's share in the Canadian dollar market.

January likely will be busy after the holiday slowdown, according to one source.

"January and February are going to be very busy months for the provincial government sector, and as we get into March, we'll start to see budget-related blackouts and issuance disruptions," the source said.

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