Debt issuance seasonally slower in Q3

The third quarter may have been slow, but debt financings on a year-to-date basis are set to make 2005 a record year, according to a report from the IDA.

“As 2005 draws to a close, it looks like another phenomenal year in the debt market,” the report says. “However, momentum will likely slow in the coming quarters. Rising interest rates and an increasingly unattractive credit backdrop may dampen investor sentiment and borrowing activity ahead.

Debt issuance in the first three quarters hit $118.3 billion, a gain of 1.7% on a year-over-year basis. At the same time, debt trading climbed to a high of $1.5 trillion in the third quarter and $4.4 trillion year-to-date — an increase of 17.2% over the first nine months of 2004.

While trade remained brisk, new debt financings slowed in the third quarter — typical of the summer months — dropping 13.6% from the second quarter to $36.3 billion.

The year-to-date strength of debt issuance can largely be ascribed to the persistent opinion that the low interest rate environment may be drawing to a close, driving borrowers to lock in their financings before interest rates climb too high.

During the third quarter, the Bank of Canada raised interest rates by 50 basis points, which likely played a role in stifling debt issuance. The central bank is expected to raise interest rates in the coming months in an effort to stave off inflation, with another 25 basis point hike seen before the end of the year.

The federal government issued $16.1 billion in new debt in the third quarter, an increase of 9.8% year-over-year. Over $1.3 trillion in federal debt changed hands in the quarter, making it easily the most actively traded, at more than 89% of total debt traded.

The feds have borrowed a total of $47 billion in the first nine months of 2005, up 2.2% from the same period in 2004.

Corporate debt was the second largest sector by issuance, with $12.3 billion in new debt hitting the market in 74 separate issues. The total value was up 5% year-over-year and $35.8 billion in corporate debt changed hands in the third quarter. On a year to date basis, Canadian corporate debt issuance totaled $45.9 billion.

The Financial & Real Estate sector was the largest borrower, accounting for 56% of corporate issuance, or $6.89 billion. CIBC topped the list with a $1.3 billion issue, while Molson Coors Capital Finance issued $900 million in bonds.

Provincial issues totaled $7.3 billion, representing a 9.3% drop in new issues. Total trade in provincial debt for the quarter was $121.4 billion. Municipal debt issuance totaled $500 million, a 38.4% drop from a year earlier. Traders exchanged $4.1 billion in municipal debt.

Money marker debt issuance continues to trend lower, with medium term notes totaling just $3.1 billion in the third quarter, a drop of 65% quarter-over-quarter. On a year-to-date basis, corporate issuance amounts to $18.3 billion, down 21% from the same period a year ago.

Government issuance of medium term notes fell to $2.7 billion, off 18.4% quarter-over-quarter. Year to date issuance totaled $12.5 billion, a decline of 23.2% from 2004.

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