Record Sales Halt 10-Month Drop in Canada Corporate Spreads

(Bloomberg) -- Canadian corporate dollar bond sales hit a new milestone, widening spreads for the first time since June 2016 and raising questions over the market's ability to absorb the glut.

Intact Financial Corp.'s offering of C$425 million ($315 million) of 10-year bonds on Wednesday brings total sales this month to above C$15 billion, exceeding the previous record of C$14.5 billion in March 2015, Bloomberg data show. The average corporate bond spread rose five basis points to 120 basis points over federal debt, according to a Bank of America/Merrill Lynch index, compared with a three-basis-point decline in similar U.S. spreads.

“The market's getting saturated at this point and we see that being reflected in spreads,” Jason Parker, Toronto-based head of fixed-income research at BMO Capital Markets, said by phone. “I would be hard-pressed to say we'll surpass C$10 billion in June, just because investors have to consolidate and absorb all the supply that was transacted in May.”

He predicts total issuance will rise to between C$85 billion and C$90 billion in 2017 from C$46.8 billion so far, lagging last year's C$93.7 billion. Some of May's biggest sales were from foreign companies taking advantage of lower unhedged funding costs in the loonie, as the Bank of Canada kept policy unchanged while the Federal Reserve tightened.

Space has opened for companies to issue because big banks -- traditionally dominant issuers in Canada -- have been increasingly selling abroad. Issuance from the financial sector accounts for 46 percent of year-to-date sales in 2017, the least on record.

Among large maple offerings in May were Anheuser-Busch InBev SA/NV's sale of C$2 billion of seven- and 30-year bonds, Canada's biggest non-bank corporate sale since 2011. PepsiCo Inc. and United Parcel Service Inc. both sold C$750 million of bonds in inaugural Canadian dollar sales.

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Local issuers were also active, with TransCanada Trust selling C$1.5 billion of a 60-year bond and Canadian Natural Resources Ltd pricing C$1.8 billion of three-year, nine-and-a-half-year and 30-year securities.

Political Risks

The increase in supply isn't the only reason behind the widening of spreads, according to Joey Mack, Toronto-based director of fixed income at GMP Securities LP.

“Political events have increased risks," he said. "That includes both the Trump administration having a reduced likelihood of getting tax and health care reform through Congress, as well as rising geopolitical concerns, from North Korean missile tests to a fracturing relationship between Europe and the U.S."

Still, corporate bonds returned 0.5 percent in May as yields on government bonds fell. A Bank of America/Merrill Lynch Canadian corporate bond index is on track for the fifth straight month of gains, taking the year-to-date return to 4 percent.

That's keeping some investors hopeful, including Phil Mesman, a Toronto-based senior partner and portfolio manager at Picton Mahoney Asset Management.

"You always get a bit of credit-spread widening when you have a lot of issuance but that gets absorbed over time,” Mesman, who manages more than C$700 million in fixed income, said by phone. "It's great to see a live and vibrant Canadian dollar corporate bond market and I do hope that continues."

--With assistance from Allison McNeely

To contact the reporter on this story: Maciej Onoszko in Toronto at monoszko@bloomberg.net.

To contact the editors responsible for this story: Christopher DeReza at cdereza1@bloomberg.net, Jeanette Rodrigues, Faris Khan