Debt issuance increases thanks to maple bonds

(October 2007) A lot of people think of syrup when they hear the word Canada, but the buzz around another maple product is growing louder by the quarter.

According to the Investment Industry Association of Canada, maple bonds had a stellar first six months of 2007, accounting for almost half of all corporate issuance from January to June. The association’s Q1 and Q2 debt issuance report notes that maples comprised 43.4% of all corporate financings, valued at $23.4 billion.

The report also states that the top five corporate bond issues in Q1 were maple issues, while 12 maple issues of $500 million or more occurred in Q2.

The popularity of maples helped boost total corporate issuance by 57% over Q1 and Q2 2006, to $54.1 billion in the first six months of this year. Corporate issuance also surpassed government issuance by 11.5% in Q2 — in the first quarter, the two were on par.

But corporate issuers aren’t the only ones that have seen their numbers shoot up. Total debt issuance in Canada increased substantially, by 24.1% to $102.6 billion. Besides being helped by corporate issuances, bond markets saw long- and short-term rates improve. Yields for 30-year bonds shot up 29 points to 4.49% while the three-month treasury-bill rate increased 11 basis points to 4.29%.

Despite the rise, the yield spread between the two-year and 10-year Canadas was nearly zero, according to the report. “Given the strong equity markets … it is expected that profit-taking will occur and a flow out of stocks and into shorter-term maturities will steepen the yield curve in the second half of 2007,” says the report.

Government of Canada bonds were one area where year-over-year numbers fell. Issuance declined 11.2% from 2006 to $14.5 billion, but federal Crown corporations were able to offset the downturn by raising $18.1 billion in the first six months of the year. That’s 49.1% higher than in the first part of 2006. Overall federal issuance increased 14.5% in Q1 and Q2 combined.

T-bills saw a decline of 17.9% from January to June. The IIAC explains that the drop was a result of the “run-up in equity markets and investors’ aggressiveness in seeking higher rates of return.”

When it comes to trading, corporates make up a small fraction of overall debt trading, though maples did account for $23.8 of all the activity — that’s a 108.1% increase over last year at this time.

“This is good news for investors as maples, issued to date as private placements to avoid regulatory costs, have only been accessible for trading in limited amounts,” says the report. “Expect more good news to come from the maple market.”

Statistics Canada offers a different perspective on maple bond activity. While the organization admits that the going’s been good for the product, Canadians sold off a lot of their foreign bonds, including maples in August. “Canadians cut a sizeable $1.1 billion worth of foreign bonds from their holdings in August, switching from a trend of heavy acquisitions stimulated by the expansion of a dynamic maple bond market,” says Statistics Canada.

StatsCan also explains that the appreciation of the Canadian dollar and the market’s current liquidity concerns have “squeezed” the maple bond space.

Still, maples are a large portion of the foreign bond market. Between July 2005 and July 2007, Canadians invested an average of $3.8 billion per month in foreign bonds, with maples making up 60% of that number. In August, Canadians shed about $59 million worth of maple bonds, accounting for a “slight decrease,” according to StatsCan.

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