The maple bond market rebounded last year to levels not seen in nearly a decade, as a flurry of foreign companies tapped the Canadian-dollar debt market for cash.
The trend was fuelled by attractive borrowing rates and strong demand from Canadian institutional investors, according to executives at some of Canada’s largest investment banks.
Maple issuance hit $16-billion in 2017, according to data from TD Securities Inc. That’s nearly three times higher than the $5.45-billion issued in 2016 and the highest level since 2007, prior to the financial crisis.
“2017 was really a watershed year for the development of the maple market,” said Steve Halliday, deputy chairman of fixed income at TD.
U.S. financial institutions have been tapping the Canadian-dollar debt market for a number of years. What made last year different was the flood of so-called corporates into the maple market – particularly well-known names that Canadian investors were eager to buy, such as Walt Disney Co., Apple Inc., McDonald’s Corp., PepsiCo Inc., United Parcel Service Inc. and AT&T Inc.
Corporate maples shattered previous records, with $9.85-billion of issuance from eight companies, according to data from TD Securities. For six of those issuers, it was their first foray into Canadian-dollar debt.
Apple Inc. set a new record for the largest corporate maple with its $2.5-billion Canadian-dollar debt debut. The company issued seven-year notes and borrowed at a rate of 2.513 per cent.
Other inaugural maples included a $1-billion deal by McDonald’s Corp. and a $750-million issuance by United Parcel Service Inc.
“I think that’s what was truly unique about last year,” said Patrick Scace, managing director of debt capital markets at TD Securities, which led six of the eight corporate maples last year, including Walt Disney Co., McDonald’s, AT&T Inc. and PepsiCo Inc..
“The names that came into the Canadian market were worldwide, very well known, best-in-class corporate issuers … it’s the cream of the crop of global issuers.”
Attractive borrowing costs – predominantly due to enticing currency swap spreads – were the primary driver, according to bankers who helped bring the issues to market. Historically, U.S. issuers would get more competitive pricing in their home market versus in Canada, said Michal Cegielski, managing director of debt capital markets at BMO Nesbitt Burns Inc. But last year, for the first time since the credit crisis, the cost of borrowing in Canada and then swapping the proceeds back to their domestic currency has, in some cases, been cheaper for issuers than borrowing in their home market.
“Canada all of a sudden started making sense, relative to the markets they naturally issue in,” said Mr. Cegielski, who worked on the Apple deal. “It just kind of worked out such that as they looked at the relative value between all their opportunities, Canada was, for the first time in a long time, pricing competitively.”
Meanwhile, Canadian investors were hungry for diversification and eager to invest in well-known, blue-chip global brands.
“The investor support is the best we’ve seen in the career of corporate maple market,” said Patrick MacDonald, co-head of debt capital markets at RBC Dominion Securities. For instance, the Disney deal – which RBC was a joint bookrunner on – was well oversubscribed and included 56 different buyers, said Mr. MacDonald. RBC was also a joint bookrunner on the McDonald’s and Apple transactions.
“The establishment of the relationship with Walt Disney and McDonald’s had been years back,” Mr. MacDonald said.
Strong investor appetite was partly owing to a gap created by the Canadian banks, which have been increasingly heading overseas for cash. In recent years, the popularity of so-called Yankee bonds, or U.S.-dollar debt, has been on the rise among Canadian issuers.
“That was a big impetus and one of the reasons why we saw maples pick up last year – because a lot of the expected Canadian supply was going elsewhere,” said Mr. Cegielski. “People were clamouring for product.”
The borrowing needs of the Canadian banks have also declined recently, in part due to a slowdown in mortgage growth.
Although investor demand and pricing dynamics made 2017 a big year for maples, bankers said the deals have been many years in the making.
“Some of these clients we’ve covered for five or six years and talked to them about the Canadian market and they’ve never come,” Mr. Halliday said.
“It’s a long effort. It might appear that last year everyone jumped on the wagon and we did all these transactions. The reality is that it was the culmination of years of coverage and years of work and years of a global strategy paying off.”
The entrance of prominent global brands such as Apple and McDonald’s is expected to entice other issuers into the Canadian-dollar debt market.
“The visibility of Canada as a viable alternative for strategic financing went up dramatically last year,” said Richard Sibthorpe, head of global investment-grade debt capital markets at BMO. That “unquestionably” encourages other foreign issuers to jump into the Canadian debt market, adds Mr. Cegielski.
But there are a number of factors that make it difficult to forecast whether the maple market will be able to repeat last year’s performance. Chief among them is the U.S. tax reform bill that will allow companies such as Apple to repatriate cash trapped overseas without losing a massive chunk of it to the taxman.
“In particular sectors where you’ve had cash trapped overseas, repatriating that cash back to their domestic market is going to impact their requirement for funding,” Mr. Halliday said.
“Apple is a great example of that. With billions trapped overseas, when that comes back do they have to raise money in their U.S. operation? The answer to that is ‘probably not,’ but we don’t really know yet. It creates a significant level of uncertainty.”
That said, issuers who have already entered the maple bond market generally did so with the intention of making Canadian-dollar debt a continuing part of their funding program.
“So, everything being equal, they’re all motivated to come back to Canada to build a curve,” Mr. Halliday said. But other factors – including pricing and demand – will need to line up the way that they did last year, he adds.