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Wednesday, 18 October 2017

1986: Canada’s US$1bn 9% due February 1996 – 'The Nines'

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‘A special deal’ - Not many bond issues enjoy such iconic status as to warrant a party to mark their redemption. But that is exactly what happened when the “Canada Nines” matured in February 1996 after a 10-year lifespan that had seen it become easily the most liquid Eurobond.

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Not many bond issues enjoy such iconic status as to warrant a party to mark their redemption.

But that is exactly what happened when the “Canada Nines” matured in February 1996 after a 10-year lifespan that had seen it become easily the most liquid Eurobond.

The event was hosted by ScotiaMcLeod, although Deutsche Bank had been lead manager on the deal. Such was the syndication process in pre-pot 1986, however, that a myriad co-leads, co-managers, sub-underwriters and selling group members felt they had equal reason to celebrate the bond’s passing, as did a swathe of traders and investors for whom it had become a quintessential part of their day-to-day business.

“It became obvious pretty early on that it was a special deal,” said Stuart Young, who was head of trading at Deutsche when it was launched. “The sales people were going crazy, with demand coming in globally in a way we had never seen before.”

“It was an extraordinary thing. Sometimes deals just work, everything clicks,” said Robert Stheeman, now chief executive of the UK Debt Management Office, but then on the syndicate desk at Deutsche in Frankfurt.

Such was the weight of early orders that the issue, originally launched as a US$750m offering, was upsized to US$1bn – at the time a significant increase.

“It was a US$1bn deal in the context of a US$250m–$300m market, maybe US$500m,” said Martin Egan, global head of primary markets and origination at BNP Paribas, who was then trading the paper at UBS.

 “The US$250m upsize would in itself have constituted a decent-sized issue on its own in those days,” said Stheeman.

Many in the market had an inkling that something momentous was in the air.

“We were told to get in early that day, just like you would for your own new issue,” said Kevin O’Neill, currently executive director of debt syndicate at Daiwa Securities, who was then head of syndicate at CSFB, a co-lead manager on the deal. “So, up we turned, and out it came – the rest is history.”

But if the primary experience was notable, it was the secondary performance that made the Canada Nines the most talked about Eurobond issue ever.

“It injected new adrenalin into a market that had been developing at a steady pace,” said Egan. “It marked the beginning of a new benchmark market – we had never seen anything like it as far as liquidity was concerned.”

“It remained liquid way beyond what you would have expected for a Eurobond, in time becoming the five-year, then the three-year benchmark,” said Stheeman.

Most bonds end up being so tightly held that liquidity drains away. However, this was not the case with the Nines, which maintained its exalted position throughout its life.

“It was just so easy to trade. It became the Eurobond benchmark and a Treasury equivalent, indeed a Treasury proxy to a large degree,” said Young.

Back in 1986, the prevailing trading convention was still on a cash price basis, even though some had begun using Treasuries to hedge positions. The Nines not only persuaded more to think about spreads but also offered a ready-made, liquid, globally traded hedging instrument in itself.

According to IFR data from the time, the paper came at a 15bp spread over Treasuries, tightening to 4bp as it outperformed, before drifting back out again.

“It took the market to a completely different level: it traded on a tight bid/offer spread 24/7,” said Egan. “And that was across the globe; traders in Europe, the US and Asia all loved it. Investors had to have it and traders had to have a position.”

Whereas previous issues had generally traded on a quarter or half-point bid/offer spread in up to US$1m, the Nines routinely traded on a 10-cent spread, US$5m a side – and tighter and bigger in some cases.

And this became a self-perpetuating phenomenon.

“What’s the point of quoting a half-point secondary spread in US$1m when others are quoting 10 cents for US$5m? You have to go tighter and bigger size, otherwise you’re not in the game,” said O’Neill.

This was not only the case as far as traders were concerned. The brokers, too, found themselves having to cut their brokerage to five cents from the previous 1/16 (6.25 cents). The positive, however, was that trading volumes were bolstered by just this one bond to such an extent that a number of brokers would acknowledge that it made (even saved) their careers.  

And liquid it remained, largely on account of its size but also because of head-to-head market-making commitments. The latter, however, was mainly predicated on the former, a US$1bn issue being too large for one firm to squeeze, meaning that paper was available to borrow and traders did not fear being caught short and ultimately bought in when they were unable to deliver the bonds.

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