FP Dealmakers: The year central banks fuelled the debt binge

Companies refinanced debt maturing over the next two years to take advantage of a benign interest-rate environment

January 31, 2020

Canadian issuer activity in corporate debt capital markets last year featured a subdued first half followed by a second-half recovery that culminated in the second most active year on record.

Statistics compiled by Financial Post Data show that debt issuances, including international offerings by Canadian companies, reached a record $208.3 billion in 2019, up 17.8 per cent over the previous year.

Interestingly, the pattern of activity in 2019 was almost a mirror image of 2018, where a record first half preceded the slowest second half since the global financial crisis.

“While the weak tone prevalent at the end of 2018 led  to a rocky start to the year, corporate issuance gained momentum as the year progressed with historically low rates and tight credit spreads spurring supply,” said Rob Brown, the Toronto-based co-head of debt capital markets at RBC Capital Markets, which led Financial Post’s full credit bookrunner corporate debt league tables, with 132 mandates totaling $30.8 billion, for a 14.80 per cent market share.

Close analysis shows that things really picked up in March, with activity concentrated rather than spread over the year.

“The four busiest months were March, June, September and October, which accounted for 50.4 per cent of issuance in 2019,” said Andrew Becker, a Toronto-based managing director at TD Securities Inc., which took second place in FP’s full credit bookrunner league tables, with 95 mandates worth $21.3 billion, representing just under 10.2 per cent of the market.

Last year also saw a surge in large financings.

“We had 12 corporate offering that exceeded $1 billion, compared to eight in 2018,” Becker said.

Notable among these large debt transactions were offerings from Bank of Montreal ($3 billion and $2.3 billion); CDP Financial Inc. ($2.7 billion and $2.6 billion); and approximately $2.6 billion from Enbridge Inc., Royal Bank of Canada, Bombardier Inc. and the Toronto-Dominion Bank each.

As it turned out, central bank policy spurred 2019’s historically low funding rates.

“All-in funding costs declined (approximately) 75-90 bps over the course of 2019, benefiting from a dovish shift in central bank policies, driving a rally in both credit spreads and underlying rates,” said Patrick MacDonald, the Toronto-based co-head of debt capital markets at RBC Capital Markets.

According to MacDonald, underlying yields declined about 20-23 bps amid a shift to easing biases from key central banks in response to a tempered global economic growth outlook, as well as prolonged trade policy uncertainty. Credit spreads tightened by about 45-65 bps and remained well supported by a persistent technical supply-demand imbalance (despite elevated annual volumes) and the positive market tone.

“The pronounced decline in yields and credit spreads allowed all-in coupons to remain near all-time lows heading into 2020,” Macdonald said.

In a market where interest rate uncertainty continued to loom, the low-funding costs seemed particularly attractive.

“An environment that had stability in rates and yields but uncertainty as to interest rates going forward made people want to take advantage of the market while they could rather than waiting for 2020, when no one knew what was going to happen,” said Michael Innes, the Toronto-based co-chair of capital markets practice at Osler, Hoskin & Harcourt LLP, which led Financial Post’s league tables for Canadian legal counsel to underwriters on debt offerings with 15 deals amounting to $13.3 billion and a 24.40 per cent market share.

Osler also ranked first in the league table for Canadian legal counsel to issuers on debt offerings, with 23 deals involving $24 billion for a 26.30 per cent market share. “The upshot was that, in 2019, a lot of people refinanced debt maturing in 2020 and 2021,” Innes said.

Companies with BBB ratings were particularly active. RBC statistics show $40.2 billion of BBB-rated supply, indicative of 29 per cent year-to-year growth in 2019.

Here, the auto sector was particularly prominent.

“The industry actively sought out funding for Canadian receivables,” Becker said.

Overall, elevated supply was primarily driven by non-corporate issuance, while financial issuance lagged 2018 levels.

“The energy infrastructure sector made up about 20 per cent of the market by itself,” said Katryne Mann, the Toronto-based managing director and head of Canadian corporate, debt capital markets at BMO Capital Markets, which stood third in FP’s full credit bookrunner corporate debt league tables with 86 mandates valued at $19.5 billion, for a 9.36 per cent market share. “And we saw new names coming to the bond market, including the real estate space.”

Among the leading transactions in energy infrastructure were two separate hybrid Inter Pipeline offerings composed of $750 million in March and $700 million in November, with underwriting provided by a syndicate co-led by BMO, RBC, TD and CIBC Capital Markets.

“These were Inter Pipeline’s inaugural hybrid securities in the Canadian market, and the March deal was the first high-yield indexed hybrid from any issuer in Canada,” Mann said.

BMO, CIBC and RBC were also bookrunners on a $1.5-billion Hydro One multi-tranche offering in April.

“That tied for the largest-sized, non-bank single offering last year along with offerings from Volkswagen and Pembina,” Mann said.

Meanwhile, TD was a member of the bookrunning syndicate on Pembina Pipeline Corp.’s $1.5-billion offering in September.

Other notable non-financial debt transactions involved U.S. healthcare REIT Ventas provision of $490 million in financing to subsidiaries of Colony Capital as part of a $1.5 billion refinancing, a deal in which Osler represented Ventas.

Canadian issuers, particularly those in the media, telecom and banking sector were active in the U.S., with Bell Canada announcing a US$600-million offering in May. That same month, Telus announced a US$500-million offering through a syndicate of lead underwriters that included RBC and TD.

“As Canadian banks become global funders who compare various markets to see which are the most attractive at any particular time, dealers with global platforms become more and more viable,” TD’s Becker said.

Compared to the general debt environment, the Maple market — Canadian-dollar denominated issuances by foreign companies — continued to languish in the doldrums.

“There was only one such deal in 2019, which was even less than the two transactions we had in 2018,” Becker said.

By contrast, government debt was up 9.60 per cent to $161 billion, according to Financial Post Data.

So, what’s in store for 2020 in the debt market?

What seems clear is that the year is off to a promising start.

“January 6, the first day after the holiday season, saw significant volumes, which to my mind is reflective of very strong fundamentals heading into the new year, indicating that growth will continue,” BMO’s Sibthorpe said.

RBC’s Brown is of similar mind, citing a “positive market backdrop” heading into 2020.

“Recent corporate transactions have been characterized by oversubscribed orderbooks, broad-based distribution, modest new issue concessions and positive secondary market performance, all of which bode well for the coming year,” he said.

Accordingly, Brown and RBC expect new issue conditions to remain constructive in 2020, particularly in the first half of the year, with low rates, tight credit spreads and robust investor demand creating a fertile new issue environment. Still, Brown cautions that continued headline risks related to trade tensions, central bank policy, global economic growth and the looming U.S. election in November are likely to induce “periods of elevated volatility and dampened activity”.

RBC’s MacDonald is looking for continued growth in the green and sustainable bond market in Canada.

“We expect this trend to gain additional momentum in 2020 and the coming years as investors focus more intently on ESG factors,” he said.

BMO’s Mann remains mindful of “macro headwinds” but believes in the “resiliency” of the market.

“This past year had trade concerns and other simmering issues in the background, but good fundamentals meant debt issuance remained strong,” she said. “The issue has really become one about picking the right access point in the face of the uncertainties, with potential headwinds causing people to act sooner rather than later.”

In that vein, Becker predicts “some pre-funding” in anticipation of the U.S. election.

Still, the best predictions aside, it’s important to remember that the performance of the debt market in 2019 was a surprise to many.

“Things were relentless for a while toward the end of 2018 and the beginning of 2019 and I would never have predicted that 2019 would turn out as well as it did,” Osler’s Innes said. “What I do believe is that the market’s reaction to macroeconomic trends will determine performance in 2020 as much as it did in 2019.”

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