FP Dealmakers: As governments pulled back on debt issuance, corporations picked up the slack

By Julius Melnitzer | February 3, 2022

Depth was the hallmark of Canada’s debt market in 2021 even as overall deal count and supply declined from the year previous.

Anomalous? Not really.

Close examination of statistics compiled by Financial Post Data show a sharp divergence between the corporate and public sectors. Corporate issuance rose 11.3 per cent to $274.5 billion in 2021 from $246.62 billion in 2020, while government issuance fell 24.2 per cent to $184.57 billion from $243.44 billion as governments pulled back somewhat from the spending spree that accompanied COVID-19’s onset.

On their own, however, the numbers understate the market’s vibrant performance in 2021, mostly because the drop-off in government debt supply came from an unusually elevated level in 2020.

“The pandemic caught everyone, including governments, by surprise, and they had to run large deficits and do it quickly to support the economy,” said Paul Scurfield, the Toronto-based managing director and head of global fixed income at Scotiabank, which ranked second among full-credit corporate debt bookrunners in FP’s league tables, trailing only RBC Capital Markets.

“So, 2020 was an uptick while 2021 was back to normal on the government debt side.”

“There’s no point even looking at 2020 given how much governments elevated their lending when the pandemic arrived,” said Sean St. John, the Toronto-based executive vice president, managing director, and co-head, fixed income, currencies & commodities at National Bank of Canada, whose 86 mandates totalling $38.5B led FP’s government debt tables with a 20.78 per cent market share.

“Going forward, we expect government debt markets in 2022 to remain normalized and in line with 2021.”

That’s good news for the economy.

“From a fiscal standpoint, the reduction in volume shows that the economy has been steadily improving, with governments no longer finding it necessary to take on the kind of insurance they thought they needed when the pandemic hit,” said Patrick MacDonald, co-head of debt capital markets at RBC Capital Markets, which led the corporate debt tables with $34.86 billion in deals and a 12.7 per cent market share.

All of which is not to say that notable public sector debt offerings were lacking in 2021. Among the most prominent were Canada Housing Trust’s $5.0-billion issuance in June; Ontario’s $2.75-billion green bond in July; Caisse de dépôt et placement du Québec’s $1.25-billion offering in October; Municipal Finance Authority of B.C.’s $975-million deal in May; and British Columbia’s $800-million transaction in June.

Having put the decline in the public sector into perspective, then, the extent to which the corporate debt market, which reached a record $274.5 billion, shone in 2021 becomes apparent.

“Canadian credit remained resilient and well-supported through the year, producing record volumes which can be attributed to sustained attractive financing costs, market expansion of new products and structures and heightened cross-border activity,” is how RBC described the environment in its 2021 Canadian Debt Capital Markets report.

The Maple bond market, ESG bonds and an unusual number of large offerings were among the trends RBC identified.

According to Financial Post Data, there were 14 government debt deals and 91 corporate debt deals that surpassed $1 billion threshold in 2021.

Sean St. John, executive vice president, managing director, and co-head, fixed income, currencies & commodities at National Bank of Canada.
Sean St. John, executive vice president, managing director, and co-head, fixed income, currencies & commodities at National Bank of Canada. PHOTO BY NATIONAL BANK FINANCIAL

“The large volume of offerings over $1 billion speaks loudly to the depth of our market,” said St. John.

Looking ahead to 2022, the consensus appears to be that supply will moderate.

“I expect the corporate surge will come off a little, perhaps 15 per cent,” St. John said.

The overarching uncertainty, according to MacDonald, is the pandemic.

“The key question for all asset classes is what will the impact be, how severe will it be, and how long will it go on,” he said. “This being said, and given that this uncertainty is occurring in a rising-interest-rate environment, corporations may be looking to restock to support their balance sheets.”

Still, MacDonald believes that both government and corporate balance sheets are in good shape, which should lead to “less concern” than at the outset of the pandemic.

“We advise issuers to be nimble and prepared for more uncertainty and volatility than we saw in what was a stable, constructive and receptive market in 2021,” he said. “After all, the volatility we’ve seen over the last five weeks (to mid-December) is more than we’ve seen over the last ten to twelve months.

Patrick MacDonald, co-head of debt capital markets at RBC Capital Markets.
Patrick MacDonald, co-head of debt capital markets at RBC Capital Markets. PHOTO BY PETER J. THOMPSON/NATIONAL POST

On the interest rate front, there appears little doubt that rates are going up.

“So it’s a question of pace, how fast and how much,” MacDonald said. “On the whole, however, I believe that markets will continue to be supportive and that demand from the investor base will still be there.”

Rob Brown, MacDonald’s co-head of capital markets at RBC, believes volatility is the wild card.

“People are expecting rates to increase, so that’s OK if it’s gradual and orderly,” he said. “But it remains to be seen how supportive the market will be of new issuance.”

Adding to the uncertainty, Brown adds, are looming inflation, unpredictable supply chains, the tensions in the Ukraine, the U.S. mid-terms and the Ontario election in June.

Overall, then, Brown expects supply to “moderate” from 2021’s record levels, but to remain “high” with a “higher front-end load in 2022” as a result of tighter monetary policy.

Demand may also fall off.

“There are lighter maturities in 2022, with some $70 billion coming off the books compared to $100 billion in 2021,” he said.

Still, all must be taken with a grain of salt. After all, the only predictable thing lately has been unpredictability.

“If you had told me two years ago I’d still be sitting in my home office, I wouldn’t have believed you,” Brown said. “And if you said we’d be registering two consecutive years of issuance like the ones we’ve had, I would have laughed you out of the room.”


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