Debt issuance takes a big hit

Debt markets continued to feel the effect of falling stock prices and declining consumer confidence in Q3 and Q4, according to the Investment Industry Association of Canada’s debt issuance report.

In the second half of 2007, debt issuance dropped 13.8% from the first six months of the year to the last. Total bond trading also took a hit, falling 5% from Q2 to Q3.

Still, debt issuance for the entire year was up 10.7%, to $205 billion, and broke the 2006 record of $185.2 billion. But that positive news is largely due to success in the first half of 2007, before the markets started spiraling.

“This was a year of two halves,” says Jack Rando, the IIAC’s assistant director, capital markets. “We had a strong first half of the year, which was really a continuation of 2006’s strong market and economic conditions. But in the second half, things were considerably different.”

Though not surprising, the biggest disappointment in 2007 came from the asset-backed commercial paper (ABCP) sector. Because of uncertain global credit markets and sub-prime mortgage problems in the United States, there were only 72 ABCP deals worth $7.5 billion last year, compared to 174 deals valued at $21.3 billion in 2006. This huge drop was a big reason for Q3 and Q4’s poor performance.

Rando explains that the problems surrounding asset-backed securities created “widening credit spreads that made issuance too costly, and issuers held off on coming to the market.”

Another area that took a big hit was the once-popular Maple bond market. Since 2004, Maples have been a favourite product for international investors, but in the latter half of 2007 there were just 15 issues worth $4.9 billion. In Q4 specifically, Maple bond issuance was down 53.8% over the same period in 2006, though year over year it was up 21.1%.

“Hopefully this is nothing more than a minor setback,” says Rando. “Once conditions settle down, credit markets in Canada should resume to healthy levels and the Maple bond market will hopefully pick up once again.”

Thanks to the decline in Maple issues, trading in the corporate bond market overall was down 17.9% in Q3 and another 7.4% in the last quarter. In the same period, debt issuance dropped 23.6% and 7.4% respectively “as issuers were less prepared to come to market offering higher yields required by investors,” says the IIAC report.

Because of the strong first half of the year, Rando is pleased with the numbers overall. Some of the positive statistics, such as corporate and Maple issuance making up $26.9 billion and $97.7 billion respectively, or that trading activity hit a near record-breaking total of $7 trillion, prove that before the markets were sent tumbling debt issuance was at its strongest.

Rando doesn’t expect we’ll see those same numbers in 2008, but if the industry’s problems work themselves out, he says there’s no reason records can’t be demolished in the future.

“This year won’t the have benefit of a strong start like 2007 did,” he says. “We’ll be surprised if the numbers are considerably better than last year’s figures, so a pullback can be expected unless we see resolutions. Really it’s an issue of investor confidence in the marketplace, and until it comes back to pre-2007 levels we can’t expect overwhelming numbers for industry.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com