From record highs to crisis lows, volatility takes toll on debt markets

On the bright side, Canada is developing a broader and deeper hybrid market

Canadian issuer activity in debt capital markets last year turned out to be nothing less than a tale of two halves: a record first half, followed by the slowest second half since the financial crisis.

“H1 was busy, the summer was the normal summer we would expect, and there was the usual ramp up just before Labour Day,” said Andrew Parker, the Toronto-based co-head of McCarthy Tétrault LLP’s national capital markets practice. “But September and October saw very, very few deals, with November picking up a little but then no further sign of the usual push to year’s end.”

Data compiled by Financial Post Data shows that when the dust settled, issue activity, including international offerings by Canadian companies, was down 10.7 per cent to $176.77 billion from $197.8 billion in 2017. Deal volume dropped six per cent to 678 transactions, from 722 the previous


“The dry-up in the fourth quarter was driven by macroeconomic factors, including trade wars, rate hikes, political uncertainty and speculation about economic stagnation,” said Richard Sibthorpe, the Toronto-based head, global debt capital markets at BMO Capital Markets. “These factors and others impacted performance and returns in securities markets, causing investors to take a much more defensive stance that in turn affected how issuers looked at their prospects.”

Credit spreads that widened as the year went on didn’t help much either.

“It was an extremely volatile year, with corporate cost 40 to 50 points higher by year’s end,” says Patrick MacDonald, the Toronto-based co-head, debt capital markets at RBC Capital Markets.

RBC, which led the corporate debt league tables, saw volume fall from $28 billion to $23.5 billion, a drop of 16.3 per cent, with September emerging as a turning point.

“At the end of August, we were $5 billion ahead of last year,” said Rob Brown, the Toronto-based co-head, debt capital markets at RBC.

TD Securities Inc., in second place, and CIBC World Markets Inc., in third place, had their respective volumes of some $20.6 billion and $12.7 billion remain virtually unchanged. BMO, which ranked fourth, saw an almost 40 per cent contraction to $10.7 billion from $17.7 billion.

“My perception is that it was a good year with a weak finish,” says Steve Halliday, executive managing director and global head, debt capital markets, corporate bond trading and distribution, at TD Securities.

And even though overall supply, at $99.9 billion according to RBC statistics, was down 16 per cent compared to 2017, RBC’s Brown maintains that things were “not all that bad, considering.”

“Last year was the fourth most active year on record, and the overall supply was very close to the $100 billion average we’ve seen since the credit crisis,” he said.

Turning to individual debt markets, the Maple market’s $9 billion worth of issuance in 2018, according to RBC statistics, was way off the $15.7 billion achieved in 2017, but still Maple’s second most active year. Maple bonds are issued by foreign issuers in Canadian dollars in the Canadian fixed income market .

Steve Halliday, executive managing director and global head, debt capital markets, corporate bond trading and distribution, at TD Securities Nick Kozak for Postmedia News

Among the more prominent transactions were AT&T Inc.’s $2 billion in issuances, as well as Bank of America Corp. and Lloyds Banking Group Plc, at $1.5 billion each.

And despite the fact that the Maples’ market dropped from about 23 per cent in 2017 of overall supply to 20 per cent in 2018, growth will continue in the medium and long-term, Halliday says.

“Maples were down a little, but they remain a very important segment of the market going forward,” he said, noting that TD was involved in nine of the market’s 11 syndicated deals and acted as bookrunner on AT&T’s issuance.

Conversely, Canadian companies, including Canadian National Railway Co. (US$900 million), Telus Corp. (US$750 million) and Rogers Communications Inc. (US$750 million) continued to take advantage of debt markets in the U.S.

“The main reasons for looking south are a need for U.S. dollars, a desire for alternative sources of capital, and diversification of the investor base,” said MacDonald of RBC, which led the vast majority of Canadian offshore issuances. “Telcos, however, tend to be more opportunistic in terms of what they’re looking for and they’re finding attractive funding costs in the U.S., especially over 30-year terms.”

On another nascent front, Canada is also developing a broader and deeper hybrid market, says Halliday of TD Securities, which participated in all of the country’s corporate hybrid issuances in 2018.

Among the prominent issuers in Canadian dollars were Enbridge and ATCO, who offered a collective $950 million in hybrid supply. Meanwhile, Enbridge and Algonquin Power & Utilities Corp. priced $1.7 billion collective in U.S. dollar hybrid supply.

In other innovations, the past year saw BMO price a $600 million Secure Overnight Financing Rate-linked floating rate note, the first such security linked to the SOFR index, seen as an alternative to the troubled benchmark London Inter-bank Offered Rate.

But the future of SOFR-linked issuance in Canada remains uncertain.

“We’re not planning to replace LIBOR here, so SOFR’s applicability is limited unless Canadian issuers are looking to make offerings outside Canada,” says Andrew Becker, the Toronto-based managing director at TD Securities.

Bail-in bonds were also in vogue during the year, a new type of bank debt which eventually could be converted into equity, if the banks’ lower-ranking reserves are not sufficient enough to offset losses. RBC was the first Canadian bank to issue senior bail-in debt in both Canadian($2 billion) and U.S. ($1.8 billion) markets after the Canadian bail-in framework came into effect on September 23, 2018.

Fitch Ratings notes that banks have until November 2021 to build up required total loss absorbing capital.

“A number of banks have successfully issued bail-in eligible debt in recent months, albeit at slightly higher rates than non bail-in debt, proving the market for these new securities,” Fitch said in a report. “Canadian banks will need to replace legacy senior debt equivalent to approximately 6%-9% of risk-weighted assets, which Fitch expects to be built up over 1-2 years.”

According to Sibthorpe, Canadian banks are well on their way to doing so.

“Our banks have been very active globally, and we expect to see more supply from bail-in funding in 2019,” he says. “But it’s all very manageable both form a volume and a borrowing perspective.”

Looking ahead, guarded optimism seems to be the byword for 2019.

“The pipeline we have isn’t a blockbuster, but it’s not bad and I’d call it ‘hopeful’,” says McCarthy’s Parker. “The fundamentals are still there, the economy seems to be moving forward and people require capital refinancing that needs to happen.”

Sibthorpe sees 2019 as beginning on a “much more defensive” stance as the business community reflects on the end of 2018 from a risk appetite perspective.

“But the past few days (around mid-January) has been more constructive, with investors and dealers back in their seats and liquidity improved,” he said. “There’s also a pretty strong backlog of issuers who opted to defer towards the end of the year and even though corporate borrowing rates have gone up, they’re still attractive.”

The wild card, however, continues to reside in the equity markets, and volatility is expected to persist throughout 2019. But that, many bankers say, is not all bad.

“In a lot of ways, we don’t mind these types of markets,” Halliday said. “They attach higher importance to institutions’ execution advice, receptivity, and ability to price pockets of investor interest.”

FP Dealmakers tables, including our full ranking for common share equity deals and our tables for preferred equity, structured products and government debt, as well as information about how we crunched the numbers, are available online at

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