Canadian high yield issuers: spoilt for choice in funding

Since 2009, with the resurgence of the high yield bond market in Canada, speculative grade companies have been spoilt for choice. They can raise money in the fast-paced and vigorous US high yield market, where $10bn of deals can easily be printed in a week. But there is also the domestic Canadian market, which allows issuers to raise capital in Canadian dollars, if not in the same amounts. 

High yield issuance in Canadian dollars has reached C$2.8bn from a dozen deals this year. And there is a good pipeline until year end, says Susan Rimmer, managing director and head, debt capital markets — corporates and financial institutions at CIBC.

Some say full year issuance could surpass last year’s record of C$5.2bn and maybe even reach C$6bn. 

Sean St John, co-head of fixed income at National Bank Financial, is more doubtful. “The bulk of natural high yield issuers came out of the gate in 2009-2011, and now there isn’t the massive number of potential high yield issuers,” he says. “The market is going to have its bigger years and softer years, depending on where we are in the refinancing schedule and with M&A-related special situations. I think we are going to finish the year light in high yield issuance.”

Issuance compared to the mighty US market still looks tiny, but it stacks up better compared with the $11.2bn (C$11.6bn) of US dollar high yield bonds sold by Canadian issuers so far this year. 

“There are things that make the two markets separate and distinct, but there is a lot of bleed-over between the US and Canada,” says Kete Cockrell, group head of high yield capital markets at RBC Capital Markets. “It is best for investors and issuers not to think of it as silos but look at it as one larger, broader North American market.”

Many issuers in the Canadian market have previously issued in the US. One such is Vidéotron, the Quebec-based integrated telecoms company owned by Québecor Média. It used to be an active Yankee bond issuer before turning to Canada.

“Vidéotron and Québecor Média are longstanding issuers in the US high yield market that have now successfully included Canadian dollar high yield bond offerings in their funding mix,” says Rimmer.

Vidéotron issued its first bond in the US as a $150m 10 year investment grade issue in 1992. It returned as a high yield issuer in 2003, but since 2010 has been active in the Canadian market. Its last bond was a C$400m 12 year issue in June this year.

“We are now entering a cycle of refinancing of Canadian dollar high yield bonds, which demonstrates the development of a sustainable market,” says Greg Greer, head of debt capital markets at Scotiabank in Toronto. 

Like Vidéotron, many former US high yield issuers are now choosing Canada over the US. 

“Historically, a number of Canadian issuers accessing the US high yield market were forced to go into an unnatural currency for their debt capital requirements, with expensive cross-currency swaps they needed to overlay or take currency exposure, so having an avenue into high yield in Canada is much more attractive to them,” says Richard Sibthorpe, head of Canadian DCM at BMO Capital Markets. 

Those that still prefer the US market either naturally need US dollars to finance their businesses, like mining and energy companies, adds Sibthorpe, or want  to raise larger amounts.

The biggest high yield bond ever in Canada was Athabasca Oil’s C$550m five year deal in November 2012. 

“Companies value that the Canadian market gives them an alternative to doing a massive deal in the US, which they have to swap back into Canadian dollars,” says Mark MacPherson, a director at BMO. “They can now print paper in Canadian dollars and do it in a smaller size, without having to pay up — minimum deal sizes in the US are in the $200m range but in Canada, we can do deals in the C$100m-C$125m range for the right name.”

The possibility of small trades benefits smaller issuers. Even companies with an Ebitda of as little as C$30m could access the Canadian market, as long as leverage does not rise too high. 

On the other hand, if an issuer wants a larger size, it can go to the US or split its deal across the border.

The $740m-equivalent dual tranche transaction for Tervita, the energy and environmental services company, was one of this year’s best examples. 

Tervita, which had tapped the US market for the first time in October 2012, sold a $650m tranche with an 8% coupon and a C$200m 9% piece, both with November 2018 maturities.

Lead bookrunners were RBC, Goldman Sachs, TD Securities and Deutsche Bank, with co-managers CIBC and NBF alongside Barclays, Credit Suisse and JP Morgan.

“There is demand in both the Canadian and US high yield markets for the other currency — there is plenty of US dollar demand in Canada and some Canadian dollar demand in the US,” says Cockrell at RBC. 

“However, the markets are much deeper for their native currencies. By doing both Canadian and US dollars, we can garner the greatest demand and attention out of the combined markets, which often results in superior execution for both transactions.”

Being the larger and more advanced market, the US is the first choice for more challenging financings such as dividend recapitalisations, leveraged buy-outs and more geared structures.

“The Canadian high yield market is primarily composed of double-B and single-B category credits,” says Scotiabank’s Greer. “However, lower rated and unrated credits have access to the market if transactions are appropriate in terms of structure and pricing.”

A direct LBO financing in the Canadian bond market has not yet been possible, but the investor base has become more sophisticated. “The number of Canadian investors in the high yield market has increased over the past years, more than doubling since 2009,” says Rimmer at CIBC. 

Bankers say a typical high yield deal used to attract around 15 buyers, now it has 35-40.

“In the next wave of development in our market — as the investor base grows and as investors become more comfortable with aggressive financing structures and covenant packages — we expect that we will start seeing homegrown Canadian LBOs in the Canadian market,” says Rob Brown, co-head of debt capital markets Canada at RBC. “But so far our LBO experience has been fairly limited.”

The Canadian market does, however, finance deals from private equity-owned companies, even acquisition-related ones.

GFL Environmental, a waste recycling business in Toronto, issued a C$200m 7.5% 2018 bond in June, partly to refinance its revolving credit facility and partly for acquisitions, without indicating a target. 

“GFL was an interesting deal because it was a sponsor-owned company and because the proceeds of the deal were used for both refinancing and for growth,” says MacPherson at BMO. “GFL is known to have grown dramatically in recent years through acquisitions and the proceeds will help them to grow further.”

One aspect of the Canadian high yield market that is both a strength and a weakness is its illiquidity. On one hand, this makes the secondary market more stable than that in the US, where inflows and outflows — especially from exchange-traded funds — cause sharp swings.

“All my traders talk about ETF flows in the US and how good credits can get sideswiped by ETFs, especially larger issuers that are a bigger part of the ETF,” says St John at National Bank.

On the other hand, he feels there is still room for more liquidity in the Canadian market. “You need all dealers supporting the secondary market and investors, too, can do more to provide more liquidity. There are only a handful of investors who actually trade stuff.”