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Foreign AAA Issuers Land in Canada Bonds as Covid Issuance Slows

This content was published on October 15, 2021 - 13:27

(Bloomberg) -- Some of the highest-rated government agencies in the world are hitting up the Canadian bond market, taking advantage of pent-up demand from investors facing an issuance slowdown from the country’s own borrowers.

Three deals have arrived in recent days. The Council of Europe Development Bank did its first Canadian dollar transaction. Norway’s Kommunalbanken AS, which provides local government funding services, returned after an eight-year pause. German development agency for agribusiness Landwirtschaftliche Rentenbank sold loonie bonds for the first time in almost seven years.

Expect more to come. Canadian provinces have slowed issuance to fund Covid relief after a record borrowing binge in 2020. That’s created an opportunity for international borrowers to tap the market -- some for the first time ever, or in years -- to unlock another pool of buyers. Provinces look poised to issue C$129 billion ($104 billion) of bonds in the fiscal year ending March 31, 2022, according to Laurentian Bank Securities. That would be down from the record C$164 billion set the previous year.

“Unlike last year where unprecedented provincial borrowing requirements resulted in governments being active issuers across all points of the yield curve, this year’s requirements are more measured,” said Douglas Bartlett, vice chair and head of government finance at CIBC Capital Markets, which was joint lead arranger for two of the three deals. “This has created capacity in the shorter tenures of the market, which in general are attractive terms for top-rated issuers such as the global community of supranational and international agency borrowers.”

Investors have been attracted by the slightly higher premiums on these top-rated bonds.

Paris-based CoE Development Bank, which was created in 1956 to deal with the refugees and migrant crisis after World War II, on Thursday sold C$300 million of three-year bonds at a spread of 22 basis points over Canadian government bonds, according to data compiled by Bloomberg. A similar duration security issued by Ontario is quoted around 17 basis points, even though it’s rated lower.

Kommunalbanken last week issued C$500 million of top-rated three-year green bonds. They are quoted at a spread of around 24 basis over Canada government bonds, according to Bloomberg bid prices Friday. That compares with a risk premium of around 16 basis points for a similar rated security issued by a Canadian Mortgage Housing Corp. program.

The agency hopes to issue more loonie debt. Canadian investors accounted for 54% of the deal, the Nordic agency said in a statement.

“We saw very good domestic demand in our trade,” Marius Ruud, senior vice president of international funding at the Oslo-based lender, wrote in an email. “Going forward, we hope we can be more active in the CAD market, offering larger, more liquid lines in the market.” 

Germany’s Rentenbank also priced three-year green bonds.

“The three-year tenure offers attractive valuations versus domestic benchmarks from Ontario and Canada Housing Mortgage Bonds -- a parameter both domestic and international investors have become increasingly sensitive to over the last few years,” CIBC’s Bartlett said.

Americas

Portable power generator supplier Aggreko’s cross-border junk-bond offering is scheduled to price on Friday. Debt-heavy alarm company Brinks Home Security also remains on the agenda, with $1.1 billion of junk bonds to help repay debt struggling to find enough buyers.

  • Bank of America came forward with a bond deal, a day after Morgan Stanley raised $5 billion. A barrage of U.S. bank-earnings beats may herald a splurge of issuance from the financial sector before borrowing costs rise too much
  • This week’s new U.S. investment-grade issues performed well in the secondary market with spreads on about 90% of deals narrowing, according to Trace
  • JPMorgan expects U.S. CLO sales to fall by 10% to 20% in 2022 from this year’s expected total as headwinds such as the Libor transition line up
  • For deal updates, click here for the New Issue Monitor
  • For more, click here for the Credit Daybook Americas

Europe

Europe’s primary market is ending the week on a quiet note after pricing more than 36 billion euros ($42 billion) in deals.

  • U.S. offshore supply vessels provider Tidewater Inc. priced a dollar senior secured note, and Aggreko’s offering is due to be sold Friday
  • The pipeline added a deal from Korea Housing Finance Corp., which mandated banks for a euro social covered bond
  • The Italian government is closing in on a deal to sell part of the troubled Banca Monte Paschi di Siena SpA to UniCredit SpA, with a rights offer to pave the way for the transaction likely to exceed the 3 billion euros initially estimated, according to people familiar with the matter

Asia

Dollar bond sales in Asia excluding Japan rose for the first time in four weeks, albeit from a low level, as contagion risks from troubled China Evergrande weigh on sentiment.  

  • China is loosening restrictions on home loans at some of its largest banks, according to people familiar with the matter, adding to signs of growing concern about contagion
  • In Asia’s ex-Japan primary market, deals climbed to about $2.7 billion this week from $770 million in the previous week, according to Bloomberg-compiled data
  • Export-Import Bank of Korea’s $1 billion green note topped the offering list by size

©2021 Bloomberg L.P.

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