Geopolitical turmoil and inflation expectations yet to negatively impact Canadian debt markets; never a better time to raise capital in this country: PwC

TORONTO, March 25, 2011— According to PwC’s Canadian Deals Leader Kristian Knibutat, “all-in funding costs for issuers of debt in Canada are extremely low – a state of affairs that bodes well for Canadian and foreign issuers seeking to tap into Canadian debt markets, including the emerging Canadian high yield market.”

Writing in the firm's Capital Markets Flash report, Knibutat says that despite a slight increase in Canadian base rates and evidence of an uptick in inflation expectations, Canadian corporate bond yields remain extremely low:

• 3 year Canadian corporate "A" and "BBB" new issues are yielding approximately 2.71% and 3.21% respectively compared to 2.71% and 3.18% on January 3, 2011.
• 5 year Canadian corporate "A" and "BBB" new issues are yielding approximately 3.34% and 3.96% respectively, compared to 3.30% and 3.87% on January 3, 2011.

These rates are the foundation upon which the pricing of most other risk assets in Canada are based.

The report sets out a credit market snapshot and summarizes select government and corporate debt market trends including:

Financial services issuers continued to dominate investment grade issuance activity during Q1 2011.

• Of the close to $20 billion in new issues in Canada year to date*, over $11 billion (roughly 60% of issuance activity) was in the financial services sector. Some of this activity was motivated by banks' desire to position themselves for the new Basel III capital rules.
• The second most active Canadian sector was real estate, with close to $4 billion worth of bonds issued, (roughly 20% of issuance activity). Real estate companies were busy refinancing, but were also observed raising capital for M&A.
• Utilities and media/telecommunications companies have also been busy, with just over $1 billion in new issues (roughly 5% of issuance activity).

Against this backdrop of nominal rates, appetite for yield continues to be voracious.

• Close to $4 billion in high yield debt has been issued in Canada during the past 18 months, up from negligible levels at the start of the past decade. A recent notable issuance was completed by SkyLink Aviation, an aviation transport and logistics company serving the governments of the United States, Canada, Iraq, Italy and organizations such as NATO, International Red Cross, United Nations. The privately held entity raised $110-million in Canada via issuance of five-year high yield debt carrying a coupon of 12.25%. The notes, rated B(low)/ B rating, several levels below investment grade, were priced at 949 bps over the comparable Canadian curve. The issuance was notable in light of the company's size, industry and the fact that, according to ratings agency DBRS it is a "cash flow company with very little in tangible real assets.

According to Knibutat, "In many ways, 2011 looks a lot like 2007. We are seeing new high yield issues from a wide variety of public and private corporates oversubscribed and clearing the market at very attractive rates. High yield issuances south of the border are even covenant-lite again."

Canada benefiting from global turmoil, increasingly attracting foreign issuers:

• In addition to high issuance activity by Canadian corporates, the relative strength of the Canadian economy and currency have propelled global issuers to tap Canadian debt markets.
• 2010 maple bond issuances set a record for the decade with 120 foreign issuers raising funds in Canada, up from an average of 32 per year in the nine years prior. Year-to-date 2011, there have already been 38 Maple bonds issued; volumes which suggest 2011 will be a second record setting year.

"2011 is set to be a record issuance year for maple bonds, measured by volume. This is indicative of Canada actually being a beneficiary in an environment of geopolitical uncertainty. Lower rates, south of the border, however, mean we are still well below peak issuance measured by value," says Knibutat.

The report questions the sustainability of the credit rally, in light of the spectre of inflation and global macro instability. Knibutat recommends that "while opportunities abound, it is an ideal time for corporates seeking to secure M&A capital or refinance to raise capital in Canada."

About PwC’s Deal Team
PwC’s Deal Team (www.pwc.com/ca/deals) helps clients to achieve deal success—from concept to close and beyond. As part of the world’s largest Transaction Advisory practice , and with our global Corporate Finance group being 2010 Upper Mid Market M&A Advisor of the Year , the PwC Canada Deals Team is your gateway to an exciting new world of emerging M&A opportunities.