Overseas Public Sector Issuers Eye Loonie Market

(Bloomberg) -- International public sector borrowers are mulling issuing in the Canadian bond market after a strong reception of transactions from the World Bank and the European Investment Bank last month, according to investment bankers at HSBC.

The International Bank for Reconstruction & Development, a unit of the World Bank, issued on July 17 C$1.5 billion ($1.13 billion) of 1.8% bonds due 2024 at 35 basis points over Canada's treasury benchmark, according to data compiled by Bloomberg. The next day, the EIB priced a C$800 million bond with a similar maturity at a 36.6 basis point spread over the Canadian benchmark.

“There is a healthy number of prospective public sector issuers who are interested in accessing the Canadian market,” if market conditions remain supportive, said Andrew Salvoni, a director at HSBC Securities Canada. “The fact that you have two foreign issuers who come with successful deals of that size is an indication there is an underlying demand for the securities.”

Public sector issuers including Germany's KFW, Export-Import Bank of Korea, and the Inter-American Development Bank have issued bonds in Canadian dollars in the past, Bloomberg data show. On top of being attracted to a consolidated domestic investor base, international investors are increasingly looking at different segments of the Canadian bond market as they seek to offset their exposures to the expanding $13.9 trillion of negative yielding bonds, mainly in Europe and Japan.

The share of non-residents trading in Canadian fixed income assets rose during the first half compared with the same period a year earlier, according to IIROC data. International investors accounted for almost 22% of the trading in Canadian treasuries between January and June, up from close to 20% in the same period in 2018.

International agencies are eyeing loonie-denominated bonds at a time when the Bank of Canada has improved its collateral policy making such securities more attractive.

Read more: Pension fund bonds tighten after Bank of Canada reduces haircuts

Last week, the central bank said it would create one new asset category called “other public sector,” which will include Canadian dollar bonds issued by foreign governments, supranationals and agencies. To be eligible for this category, securities must be of “sufficiently high quality as determined by the bank,” or broadly equivalent to a AA- rating, it said.

For instance, for securities with remaining maturities between five years and 10 years, the haircut, or discount of the bond value, will be 3.5%, compared with 6.5% previously.

To contact the reporter on this story: Esteban Duarte in Toronto at eduarterubia@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Rizal Tupaz, Jacqueline Thorpe

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