Cara deal set; Sherritt up; Canadian issuers issue more than half of U.S. covered bonds

By Cristal Cody

Prospect News, Nov. 7 - The short holiday week got off to a busy start on Monday with a Canadian issuer selling high-grade bonds in the U.S. market, while details jelled for Cara Operations Ltd.'s high-yield bond offering.

In Monday's activity, the Canadian National Railway Co. sold $700 million in two tranches of bonds.

Cara is expected to price C$75 million of new 9 1/8% senior second-lien notes due Dec. 1, 2015 on Tuesday.

Elsewhere in the high-yield market, Sherritt International Corp.'s new bonds traded in a tight range above par, a trader said.

In other trading, covered bonds, which have widened more than 50 basis points since August, are getting a closer look these days for the value as bond spreads widen on the European sovereign debt crisis, BMO Capital Markets strategists said in a research note on Monday.

"These higher quality credit spreads have followed the widening of unsecured corporates," the strategists said.

Covered bonds are sold and guaranteed by the creditworthiness of the issuing financial institutions, and the bonds also are covered by an over collateralized, bankruptcy remote collateral pool of assets, BMO noted.

European and Canadian issuers historically have dominated issuance in the sector, but as investors shy away from European risk, Canada's share has jumped, the BMO strategists said.

"More than half of the nearly $45 billion in U.S. dollar-denominated issuance in 2011 has come from Canadian institutions," BMO said.

Canadian issuers have been active in the U.S. covered bond market over the last two months.

In October, Bank of Montreal sold $2 billion of 1.3% three-year covered bonds (Aaa/AAA) at Treasuries plus 84.9 bps and National Bank of Canada raised $1.4 billion in the sale of 2.2% five-year covered bonds (Aaa/AAA/AAA) at Treasuries plus 104.5 bps.

Toronto-Dominion Bank was in the market in September with $5 billion of covered bonds (Aaa/AA-) in two tranches. The $2 billion of 0.875% three-year notes priced at a spread of Treasuries plus 58.4 bps. The $3 billion of 1.625% five-year notes sold at 73.4 bps over Treasuries.

Also in September, Canadian Imperial Bank of Commerce sold $2 billion of 0.9% three-year covered bonds (Aaa/AAA/AAA) to yield Treasuries plus 58.7 bps.

"Investors find value in Canadian financial institutions due to the strong financial system, close ties to the U.S., relative separation from a turmoil filled euro zone, and the Canadian government collateral guarantee (with the exception of Royal Bank bonds)," according to the BMO note. "Investments in Canadian financials out to 3.5 years pick up most of the high-grade covered bond spread."

Government bonds moved lower on the short end of the curve on Monday. Canada's two-year note yield rose 3 bps to 0.95%. The 10-year note yield rose 1 bp to 2.15%. The 30-year bond yield ended unchanged at 2.81%.

Canadian railway taps market

In the U.S. high-grade market, Canadian National Railway sold $700 million of notes in two tranches on Monday, according to a term sheet.

The offering included $300 million of five-year notes and $400 million of 10-year notes.

The five-year notes were priced at a spread of Treasuries plus 75 bps. The 1.45% notes were priced at 99.236 to yield 1.607%. They feature a make-whole call at any time at Treasuries plus 15 bps.

The 10-year notes were priced at a spread of Treasuries plus 95 bps. The 2.85% notes were priced at 99.339 to yield 2.947%. Those notes also feature a make-whole call at any time at Treasuries plus 15 bps.

The notes (A3/A-/) were sold through joint bookrunners Citigroup Global Markets Inc. and J.P. Morgan Securities LLC.

Proceeds will be used to repay all of the company's outstanding commercial paper, as well as to fund general corporate needs.

Cara to sell notes due 2015

Coming up on Tuesday's calendar, Cara Operations (/BB-/DBRS: B) is expected to be in the market in the afternoon with an offering of C$75 million of 9 1/8% senior second-lien notes due Dec. 1, 2015.

The deal is expected to price shortly after the consent solicitation amendment for its existing bonds closes on Tuesday, a bond source said Monday.

Cara initiated the consent solicitation for a waiver to its outstanding 9 1/8% senior second-lien guaranteed notes due Dec. 1, 2015. The consent expiration had been extended to noon on Tuesday.

The new notes have a change-of-control put at 101% and an equity clawback up to 35% until Dec. 2, 2012. The notes also have a Canadian call at 50 bps over the Government of Canada benchmark.

The notes are guaranteed by 765038 Ontario Ltd.; Cara Restaurants GP Inc.; Cara Restaurants Ltd. and Gen 5 Networks Ltd., including Prime Restaurants Inc. and all of its subsidiaries.

Scotia Capital Inc. is the lead manager of the sale. Co-managers are RBC Capital Markets Corp., TD Securities Inc., BNP Paribas (Canada) and CIBC World Markets Inc.

Proceeds will be used to fund Cara's acquisition of Prime Restaurants, which is expected to close in January.

Vaughan, Ont.-based Cara is Canada's largest full-service restaurant operator with brands that include Swiss Chalet Rotisserie & Grill, Harvey's and Montana's Cookhouse.

Sherritt trades

Sherri International's 8% senior notes due Nov. 2, 2018 have been seen trading in a tight range and were quoted Friday at 100.375 bid, a trader said.

The company sold C$400 million of the seven-year notes (DBRS: BB) at par to yield 8% on Oct. 28.

Toronto-based Sherritt International produces coal and mines and refines nickel.

Sheri Kasprzak contributed to this review

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