Maple Bonds, Canada Pension Allocations
Rewriting the Rules
Ewen McMillan, a capital markets officer at the Luxembourg- based European Investment Bank, said it’s easier to sell debt with longer maturities in Canada because of demand from the country’s pension funds and insurance companies. The EIB sold two Maple issues due in 30 years and one that matures in 2045.
Maple bonds have an average duration of more than six years, compared with less than four years in Australia’s Kangaroo market, according to Bloomberg data.
Until February 2005, when former Finance Minister Ralph Goodale rewrote the rules on foreign holdings, the country’s pension funds and employee retirement-savings plans couldn’t have more than 30 percent of their C$850 billion of assets outside Canada. By lifting the 34-year-old cap, the government freed up money that had been stuck in domestic stocks and bonds.
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Canada Outgrows China as Newest Market for Worldwide Borrowers
By Doug Alexander
April 30 (Bloomberg) — From Reykjavik to Wellington, the queue in Toronto is making Canada the fastest-growing market for international borrowers. Not even China’s burgeoning bond sales can keep up with the pace of foreign debt being issued in Canadian dollars.
Canada’s supremacy as the capital market of choice for companies as diverse as New Zealand’s Telecom Corp. and Iceland’s Kaupthing Bank hf has a lot to do with the Ottawa- based government’s obsession with balanced budgets, some of the lowest interest rates available anywhere, a sinking currency against the euro and a 2-year-old law that lets pension funds own as much foreign debt as they want without a tax penalty.
While the C$21.3 billion ($19.1 billion) of so-called Maple bonds represent 10 percent of the Yankee debt sold by international issuers in the U.S. last year, the Canadian market is growing twice as fast and may exceed C$50 billion in 2007. For RBC Capital Markets and Merrill Lynch & Co., the firms that have arranged more than half of the new offerings, which were scarce prior to 2005, the fees from these deals will top C$160 million, according to data compiled by Bloomberg.
“The Maple bond phenomenon is certainly one of the biggest things to hit the fixed-income market in Canada in many, many years,” said Andy McNair, managing director of debt syndication at TD Securities Inc. in Toronto, which has hired and transferred employees to London, New York and Sydney to meet demand for the securities.
Wellington-based Telecom Corp., New Zealand’s largest phone company, picked Canada for its C$275 million of 4.75 percent bonds, its biggest debt offering yet. Reykjavik-based Kaupthing Bank raised C$500 million, taking advantage of the lowest interest rates outside Japan and a currency that has dropped 7 percent in the past six months against the euro.
Tax Shelter
The government of Prime Minister Paul Martin transformed the market in 2005 by scrapping a limit on tax-sheltered holdings in foreign stocks and bonds. Pension funds, the country’s biggest institutional investors, needed a substitute for the shrinking supply of federal debt after eight straight years of budget surpluses. That year, sales of Maple bonds climbed to C$8.65 billion from C$600 million in 2004.
The markets competing with Canada aren’t keeping pace. In Japan, sales of so-called Samurai bonds shrank by 59 percent to 741 billion yen ($6.2 billion) last year. Australia’s Kangaroo bond offerings totaled A$32.7 billion ($27.1 billon), up 30 percent from 2005.
While China has so far limited the ability of foreign companies to sell debt to domestic investors, bonds sold by Chinese companies on the mainland and in Hong Kong totaled $193 billion last year, up 91 percent from 2005, Bloomberg data show. That compares with the 146 percent gain for Canada’s Maple bonds.
Maple Leaf
The Maple leaf, a Canadian symbol for centuries that graces the national flag, found its way into the bond market in January 2005. After hosting a lunch at which moose, beaver and Canuck were proposed as monikers, Toronto-Dominion Bank’s TD Securities unit settled on maple for its next deal, and the name stuck.
Telecom Corp. was attracted by interest rates a half-point lower than comparable U.S. borrowing costs and the opportunity to sell longer-dated bonds, said Nick Olson, the company’s general manager of finance. “The pricing was good relative to other international options,” he said. Telecom Corp. sold seven-year bonds in September, Bloomberg data show.
Canada’s biggest Maple deal so far was for Morgan Stanley, which raised C$2.5 billion in February.
Saving C$1 Million
“We started looking at the market more actively, looking at cost differentials, as well as the investor diversification benefit, and thought it was the right time to go ahead with a transaction,” said Jai Sooklal, assistant treasurer and global head of financing at New York-based Morgan Stanley, the second- biggest U.S. securities firm by market value. “We would have been happy with anywhere from C$1 billion to C$1.5 billion, so to see the response that we got, we were extremely pleased.”
With the euro rising against the U.S. and Canadian dollars, European borrowers have become the biggest Maple bond issuers, accounting for about half the sales. As the currency gains, the cost of paying interest and principal in Canadian dollars falls.
France Telecom SA, Europe’s second-largest phone company, was drawn to Canada “by the attractive cost of funding” and the chance to broaden its investor base, said Herve Labbe, who’s responsible for bond sales at the Paris-based company, in e- mailed comments. On one of its two Maple sales, a C$250 million offering last year, France Telecom figures it saved more than C$1 million in interest over the life of the bond by issuing in Canada and then swapping the currency risk into euros.
Rewriting the Rules
Ewen McMillan, a capital markets officer at the Luxembourg- based European Investment Bank, said it’s easier to sell debt with longer maturities in Canada because of demand from the country’s pension funds and insurance companies. The EIB sold two Maple issues due in 30 years and one that matures in 2045.
Maple bonds have an average duration of more than six years, compared with less than four years in Australia’s Kangaroo market, according to Bloomberg data.
Until February 2005, when former Finance Minister Ralph Goodale rewrote the rules on foreign holdings, the country’s pension funds and employee retirement-savings plans couldn’t have more than 30 percent of their C$850 billion of assets outside Canada. By lifting the 34-year-old cap, the government freed up money that had been stuck in domestic stocks and bonds.
At the same time, the federal government has reduced its supply of outstanding debt by C$79.3 billion, or 22 percent, in the past six years, giving the country’s bond investors fewer options at home. As a result, Canadians bought a net C$78 billion of international securities in 2006, more than four times as much as in 2004, according to Statistics Canada. Most of that total was foreign bonds.
Dispatched From Reykjavik
Sun Life Financial Inc., Canada’s third-biggest insurer, has more than C$400 million invested in Maple bonds, mostly corporate issues by European banks, said Candace Shaw, head of North American public fixed-income.
“The reception from the Canadian investors was extremely good,” said Kaupthing Chief Treasurer Gudni Adalsteinsson, who almost doubled the size of a Maple bond issue for Iceland’s biggest bank in February after sending a team to four Canadian cities from Reykjavik.
The Maple bond market has thrived because Canada’s sinking dollar relative to the euro and low interest rates relative to the U.S. cut costs for foreign companies. Demand may wane if that rate gap narrows, the Canadian dollar reverses course and gains against the euro, as it did in 2005, or banks charge borrowers more to neutralize the currency risk.
Incipient Indigestion
“We don’t have a need for Canadian dollars, so we swap out into U.S. dollars or euros and the cost of the swap has risen, especially last year,” said Petra Wehlert, co-head of funding at KfW Group, the German state-owned development bank in Frankfurt that ranks as Europe’s largest issuer of non- government bonds. “Many borrowers have a need to swap out and it’s getting harder.”
Robert Follis, director of corporate-bond research at Bank of Nova Scotia’s Scotia Capital unit, said investors may lose interest if underwriters aren’t able to attract a broader range of issuers. So far, most Maple bond sales have been by banks, securities firms and insurers.
“The market is starting to feel a bit of indigestion about financial issuers,” he said. “There is a real need and desire to get non-financial Maple issuers into the market.”
Record Pace
For now, Iceland’s Kaupthing is one of the clients making Merrill, the world’s third-largest securities firm, an unlikely leader in Maple bonds. A perennial also-ran in the Canadian debt markets since its 1998 purchase of Toronto-based Midland Walwyn Inc., Merrill ranks second to Royal Bank of Canada’s RBC Capital Markets after helping to arrange $3.27 billion of the $15.2 billion in sales so far this year. Those deals have earned the firm about C$8.7 million in fees.
Merrill’s other clients include New York Life Insurance Co., the largest U.S. insurer owned by its policy holders, Edinburgh-based Royal Bank of Scotland Group Plc and Network Rail, the government-backed U.K. railway owner. Kaupthing hired New York-based Merrill and TD Securities to sell C$500 million of five-year Maple bonds with a 4.7 percent coupon in February.
Demand for the securities has been growing so fast that underwriting fees this year may be more than double the C$80 million that banks made selling debt for the Canadian government last year, Bloomberg data show. TD Securities, ranked third after RBC Capital and Merrill, estimates that C$40 billion to C$50 billion of Maple bonds will be issued this year.
Canadian Banks
“We’ve had a very active first quarter,” said Larry Bates, head of debt capital at Toronto-based RBC. “I expect another record year.”
Scotia Capital, a unit of Bank of Nova Scotia, and Bank of Montreal’s BMO Capital Markets rank fourth and fifth, respectively. CIBC World Markets, No. 1 in Canadian government bond sales this year, is sixth.
Bloomberg determines Canadian debt rankings by dividing the amount raised among the banks managing the sale and giving a bonus credit to the lead arranger, in line with local-market practice. Underwriters earn an average fee of 0.32 percent on Maple bonds, about the same as for a domestic corporate offering, according to Bloomberg data.
Holger Koncewicz, funding official at Landwirtschaftsliche Rentenbank in Frankfurt, said Canada’s Maple bonds are “on the right track to become a major international market.”
No Currency Risk
The securities still appeal to Canadian investors because they offer a chance to buy international debt without the risk that currency movements will dent profits. That’s what happened in 2005, when Canadians who bet on European corporate bonds lost almost 12 percent as the Canadian dollar surged against the euro, according to the Merrill Lynch EMU Corporate Index.
The Scotia Capital Maple Bond Index, which includes 96 government and corporate issues with a total market value of C$39.6 billion, returned 5.62 percent in the year ended March 31. The Scotia Capital Universe Bond index, which includes Canadian corporate and government bonds, had a 5.46 percent return during the same period.
“They’ve done exactly what we’ve wanted them to do in our portfolio and they’ve performed as well, or better, as any of our Canadian names, so we’re very happy with it,” said Sun Life’s Shaw.
To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net
Last Updated: April 29, 2007 19:02 EDT
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