Canada Housing wraps mortgage bond deal, Vancouver taps market; Capital Power Income sinks

By Cristal Cody

Prospect News, Nov. 16 - Two Canadian bond deals priced in the government market under a moderate tone on Wednesday, sources said.

Canada Housing Trust sold C$3.75 billion in two tranches of Canada Mortgage Bonds early on Wednesday.

Meanwhile, the City of Vancouver was in the market late afternoon with an offering of C$140 million of 10-year debentures.

"Market tone is moderate, but there's been a bit of a drag from the European situation, but we're seeing some issues," a bond source said. "It's better to have a moderate negative tone than huge upswings up and down."

Deal activity over the week should remain modest depending on market tone, a source said.

In the secondary market, Capital Power Income LP's bonds plunged in trading on DBRS' downgrade of the company into junk territory.

Corporate bonds ended weaker overall. The Markit CDX Series 17 North American high-grade index eased 2 basis points to a spread of 134 bps.

Canadian government bonds moved higher on the mid to long end of the curve late in the day, sending yields down about 2 bps. The 10-year note yield fell to 2.09% from 2.11%. The 30-year bond yield fell 3 bps to 2.72%.

Canada Housing Trust prices

Canada Housing Trust (Aaa/AAA/DBRS: AAA) sold C$3.75 billion in two tranches of Canada Mortgage Bonds on Wednesday, according to a bond source.

In the first tranche, the trust priced C$1.75 billion of floating-rate bonds due March 15, 2017 at par to yield the three-month Canadian Dealer Offered Rate plus 20 bps.

In the second tranche, Canada Housing Trust sold C$2 billion of 2.65% bonds due March 15, 2022 at 99.778 to yield 2.675%, or a spread of 56 bps over the Government of Canada benchmark.

RBC Capital Markets Corp., CIBC World Markets Inc., BMO Capital Markets Corp. and National Bank Financial Inc. were the lead managers.

Canada Housing Trust last came to market in September with a C$5 billion offering of 1.85% five-year fixed-rate notes, priced at 99.867 to yield 1.877%, or a spread of 44 bps over the Government of Canada benchmark.

Canada Housing Trust is a unit of Canada Mortgage and Housing Corp., which offers financing, mortgage loan insurance and mortgage-backed securities.

Vancouver sells 10-year paper

Also in Canada, the City of Vancouver (Aaa/DBRS: AA) sold C$140 million 3.45% 10-year sinking fund debentures at 99.857 to yield 3.467% on Wednesday, according to a bond source.

The debentures due Dec. 2, 2021 priced at a spread of 133 bps over the Government of Canada benchmark.

The debt is non-callable.

CIBC World Markets was the bookrunner. RBC Capital Markets was a co-manager.

Capital Power slides

Capital Power Income's 5.276% notes due November 2020 sold last year dropped to 61 bid, 63 offered in secondary trading on Wednesday, a high-yield trader said.

The company sold C$300 million of the 10-year notes at par on Nov. 9, 2010.

DBRS announced earlier in the day it downgraded Capital Power Income's bonds to BB from BBB on the closing of the Canadian power company's takeover by Boston-based Atlantic Power Corp. on Nov. 7.

DBRS said that it dropped the company's senior debt and medium-term notes to BB from BBB and its cumulative preferred shares of affiliate CPI Preferred Equity Ltd. to Pfd-4 from Pfd-3.

The downgrade is based on the combined company's weaker financials, including higher total debt.

Sino-Forest sinks on news

A trader quoted beleaguered timber operator Sino Forest Corp.'s 10¼% notes due 2014 at 53 bid, calling the bonds down 9 points on the session.

"They've been in the news, he said, "kind of just headlines."

He said that in the current environment, "when bad news comes out about a company, it doesn't just trade down a couple of points, it trades off a cliff."

He likened it to "someone who gets mono [i.e. mononucleosis] - no one wants to go near them for a while."

However, another trader did not see those kinds of gyrations in the troubled Canadian-Chinese timber company's paper - he said the 101/4s started the day around a 56-58 context, and then retreated around a point, to 55-57. He also saw its 6¼% notes due 2017 down ½ to 1 point at 47 bid, 48½ offered.

At another desk, a market source said the bonds' gyrations took place against the backdrop of a report issued on Tuesday, when most of the action in Sino-Forest took place - Wednesday was just a mopping up session, he said.

On Tuesday, an independent committee empanelled earlier this year delivered its preliminary report. The committee was set up after Sino-Forest was rocked by scathing accusations from Hong Kong-based investment firm Muddy Waters LLC that the timber plantation company was little more than a "Ponzi scheme" and "a near total fraud." However its report essentially exonerated Sino-Forest of those serious charges, although it did find some problems.

News that the report had debunked the most serious Muddy Waters accusations caused the 101/4s and the 61/4s, which both had previously been trading in a 31-32 range, to shoot right up at the open on Tuesday, both to around the 60 level, about double their previous quotes. The 101/4s went home Tuesday trading around 62 bid, while the 61/4s fell from its early peaks to end at 50 bid, both on volume of about $14 million.

With investors having had a chance to read about the report more thoroughly, including the problems uncovered, both bonds fell back a little on Wednesday, though in much less-busy trading, with the 101/4s ending the day down 9 points at around 53, but with a last round-lot trade a bit higher, at 57, while the 61/4s retreated to around 47 bid, with about $4 million having changed hands.

Both issues actually were trading on Wednesday at the respective levels around where most of Tuesday's activity had taken place before those prices were lifted late in the session Tuesday.

While the report appeared to largely discredit the spectacular allegations of fraud raised by Muddy Waters CEO Carson Block - who rejected the independent report as a whitewash - it did find some potentially serious problems with the company, including missing or even possibly falsified records, and the absence of an internal audit function. It also noted that some executives had been uncooperative, and, according to published reports, found that some employees had formed unusually and possibly suspiciously close relationships with suppliers and customer intermediaries, including, in one case, shared access to bank accounts.

Canadian authorities meantime continue to investigate the Toronto-based company.

-Paul Deckelman contributed to this report

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