Conditions right for new corporate bonds

(August 6, 2004) Corporate Canada could be set to unleash a flurry of new bond issues over the next six to 12 months, with several economic factors supporting such a move, according to a report from Standard & Poor’s Ratings Services.

“The sustained recovery in the North American economy and a building global economic recovery are producing an increase in business spending,” said Standard & Poor’s economist and fixed income analyst Robert Palombi.

Canadian businesses are currently increasing their capital spending to improve productivity in an increasingly competitive global market and will likely need to turn to the fixed income market to raise the cash they need.

The report also points to increased consolidation activity in the market, which will require even greater amounts of capital.

“This mix of investment activity should produce increased bond issuance both domestically and in the cross-border market,” the report says.

Also supporting an increase in new bond issuance, there is a “bulge” in the market of bonds from the last business cycle now approaching maturity, which most corporations will be seeking to refinance. Add to that the accepted wisdom that interest rates will be slow to rise in the near term, making bonds a cheap way to refinance.

“Moreover, benign inflation fundamentals and improving credit quality will have a beneficial influence on investor demand as the market absorbs new bond supply,” the report says. “These favorable demand conditions will help to curtail the widening in credit spreads expected to result from the increase in new bond supply and will also help to mitigate upward pressures on the cost of capital for corporate borrowers.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com