Canada’s high-yield bond market suddenly becomes the hottest market in years

The often overlooked Canadian high-yield debt market is going through a period where companies are piling in to sell debt and investors are trying to lock in coupons before the central bank’s monetary policy easing occurs.

Spurred by relatively cheap financing, companies have raised about C$4.7 billion (S$4.5 billion) through non-investment grade debt sales so far this year; This was the second-fastest pace of issuance since at least 2017, according to data from the National Bank of Canada. and Bloomberg.

The high-yield craze is fueling investors pouring money into increasingly risky assets to capture returns; This trend is expected to accelerate further as the Bank of Canada moves towards reducing interest rates and the Federal Reserve follows suit. his own relief.

The resurgence of junk bonds in Canada was ironically sparked when Videotron, a major source of crazy junk bonds, changed status to investment grade with rating upgrades from Moody’s Ratings and S&P Global Ratings in May. The company, a division of Quebecor Media, is a major seller of junk bonds in Canada, with more than C$3 billion of bonds outstanding at the time, according to data compiled by Bloomberg.

Canada’s junk bond market is a small world; Despite recent growth, this year’s issuances are still just 1.5 percent of the size of its southern neighbor, according to data compiled by Bloomberg. Videotron’s exit has created an opportunity for new and existing issuers, sending bondholders scrambling to acquire new ones, according to Sean St. John, vice president and general manager of National Bank Financial.

Junk bond issuers are moving to “accelerate funding plans, opportunistically refinance existing debt and extend maturity profiles,” said Rob Brown, co-head of debt capital markets at Royal Bank of Canada.

Funding costs for firms selling debt are at their lowest level since 2022.

The inverted yield curve — where short-term debt is more expensive than long-term debt — has encouraged sellers to cover short-term bank debt in the high-yield market for much of the year, according to Brown and his co-chairman. Patrick MacDonald at RBC.

National Bank’s St. John said high-yield coupons have been squeezed so much that they are now relatively competitive with bank loan pricing. “Many issuers are weighing the value of diversifying their debt capital and issuing longer-term, contract-compliant lightweight paper at little or no premium, and in some cases even at more attractive rates than what banks are offering them,” St. John told Bloomberg. .

According to Brown and MacDonald, this excitement for buyers stems from expectations that interest rates have peaked and it’s time for yields to hold steady. The Bank of Canada has cut interest rates to 4.25 per cent three times since June, while the decline in inflation paves the way for even deeper cuts.

The relatively small size of the Canadian junk bond market also has its advantages: It can mean a lower barrier to entry for companies looking to borrow limited amounts.

ATS, an Ontario-based equipment manufacturer and a U.S. continuous issuer, chose to sell Canadian dollar-denominated debt in August because it did not need financing for a benchmark-sized U.S. dollar deal, according to St. John. The average tranche size of this year’s Canadian dollar deal is C$311 million, significantly lower than the U.S. market, according to National Bank of Canada data.

Another factor making this a perfect storm for high-yield issues is the strong inflow of funds into fixed income, which has led to a strong appetite for new bonds, according to St John.

“Investor sentiment has been extraordinary,” St. John said. “I think there is more liquidity in the secondary market than ever before.” BLOOMBERG