Canada Bond House
A safe pair of hands: A great bond underwriter in Canada had to be able drive a small group of issuers and investors to new limits. Deal sizes had to expand, tenors had to be pushed out, and new pockets of demand opened up. For doing all this and more, RBC Capital Markets is IFR’s Canada Bond House of the Year.
RBC Capital Markets did not stint on providing good advice and enviable execution to its legion of clients in 2011. While Canada’s is a small, closely held bond market, it took a large, wide-reaching firm to lead the aggressive pack of investment banks chasing this ever-evolving bond business.
Volatility was the name of the game in Canada, like elsewhere, and it needed smart and nimble bankers to navigate the fluctuations and advise would-be borrowers when to tap investors. Whether it was showing Triple B clients how far out on the curve they could go or finding pockets of domestic demand for a high-yield issuer, RBC was always there with a solution.
The solution might not have always been what a prospective issuer wanted to hear, but more often than not the advice was spot-on and the eventual execution well-received.
“Market conditions have been very volatile, driven by concerns about Europe, concerns about the US, and about China growth – there are a lot of reasons for volatility,” said Patrick MacDonald, managing director, debt capital markets, at RBC.
“In times of volatility issuers are less complacent on the leads that they choose and have to pick a bank with the best execution. They’re going to go with a safe pair of hands.”
It was this flight to safety – or quality – that allowed RBC to carve out such a large portion of the market. In times of volatility, prospective borrowers move towards underwriters noted for stability.
But while the firm is the out and out leader in the Canadian bond business, that doesn’t mean its lead is not constantly under threat.
“RBC continues to be the biggest in the Canadian bond business,” said one investor. “It’s tough to stay on top and keep your volumes up while others are trying to nip at your heels.”
RBC has not only kept its volumes up, it also has been one of the market’s key thought-leaders and that has allowed it to price deals through thick and thin.
“We’ve demonstrated outperformance in periods of high and low volatility,” MacDonald said. “We maintain our top spot in the market through trading, research and sales and developing relatively new products, such as the growing high-yield market or reopening the Maple market.”
Canadian high-yield
While the Canadian high-yield bond market is only a few billion Canadian dollars in size, it is growing by the year, with the help of RBC’s efforts.
“We’ve had another billion in high-yield new issuance this year, and while nothing like the US market, it’s certainly encouraging,” MacDonald said.
Take Connacher Oil and Gas. In May, the Calgary-based company, rated Caa2/BB–, hit the market with a two-part trade: a US$550m tranche of 8.50% notes due August 2019 and a C$350m tranche of 8.75% notes due August 2018. RBC was lead-left on the Canadian dollar tranche and one of the global co-ordinators on the entire financing.
The financing was a major one for the energy company. It decreased its borrowing costs and allowed it to borrow a portion of its outstanding in Canadian dollars, a more efficient capital structure for the issuer. Proceeds were used to take out expensive US dollar debt.
The deal funded a US$782.9m purchase of 11.75% first-lien notes and 10.25% second-lien notes. RBC’s talents extended beyond the new issue, too. Connacher selected the firm as one of the dealer managers on the tender offer.
It didn’t stop there, either. RBC was a joint bookrunner for Ford Credit Canada’s November 8 Canadian dollar financing. Ba1/BB/BB+ rated Ford printed a C$450m offering of 4.20% two-year notes at plus 325bp.
“The high-yield deals have performed well, and Canadian high-yield credits are accessing Canadian dollars where they’ve had to issue in US dollars in the past,” MacDonald said. “High-yield names have actually been active participants.”
Thirty years
It wasn’t only high-yield names that reaped benefits. Issuers higher on the credit-quality spectrum also asked RBC for solutions.
Baa2/BBB rated Rogers Communications, for example, needed to raise funds to redeem US$350m in 7.875% notes and US$470m in 7.25% notes, and it enlisted RBC as one of two bookrunners on a C$1.85bn trade.
Not only was Rogers successful but it borrowed in Canadian dollars, the currency it does business in, to pay off US dollar-denominated debt.
What’s more, Rogers ended up pricing a C$1.45bn tranche of 5.34% senior notes due 2021 and, not typical for a Canadian Triple B credit, a 30-year bond totalling C$400m.
“Over the last couple of years there’s been an increase of capacity that domestic issuers can get out of the market so there’s less of a need to go elsewhere, and the price points for domestics have become more attractive,” MacDonald said. “The tenor has gone out – look at Rogers’ 30-year. Historically Triple Bs could not get 30-year money.”
Clearly, RBC has pushed the envelope on larger domestic corporate issuers and redefined what is possible on the Canadian debt capital markets.
“What’s driving this is an appreciation for local companies and their balance sheets,” he said. “And issuers are able to go out on the curve because investors are searching for additional yield.”
Maples on thin ice
The new corporate business helped make up for the lack of Maple issuance in 2011. The pace of foreign issuers coming to the Canadian dollar market may have slowed but RBC was able to find business in the waning market.
“The Maple market has been traditionally dominated by financial names but financials haven’t fared very well in the crisis,” MacDonald said. “As in the US, we’ve seen more stability in non-financials: their credit ratings have been relatively stable … Maple supply has been dragged down by financial names and as a result Canadian investors have been more interested in industrial corporate names.”
There was some demand for Maples. When in January Morgan Stanley wanted to diversify its debt profile by issuing in Canadian dollars it tapped RBC, and two other firms, to price a C$400m tranche of 4.85% five-year bonds at plus 230bp. RBC was also tapped as a lead on Goldman Sachs’ C$500m tranche of 5.00% seven-year notes, which printed at plus 212.3bp in April. In the same month, Lloyds had RBC run the books on its C$500m 5.28% tranche of five-year notes, which printed at plus 250bp.
RBC is able to have access to foreign issuers in part because of its versatility in international markets.
“We’re well positioned in Canada but we also have expertise in the euro, pound sterling and the US dollar,” MacDonald said. “We offer our clients the ability to issue in Europe, the US and Canada.”
Covered bonds
One big theme in the Canadian bank financing market this year was covered bonds. Canadian firms were among the most prolific covered bond issuers, and no local bank would be successful without being capable in this market. There again, RBC measures up.
And this does not only include self-led transactions, of which it had several in US and Canadian dollars and Swiss francs, but other issuers using RBC. Most recently, National Bank of Canada enlisted RBC as one of four underwriters on its US$1.4bn 2.20% five-year covered bond.
To see the full digital edition of the IFR Americas Review of the Year, please click here.
