(Bloomberg) — The often-overlooked Canadian high-yield debt market is having a moment, as companies pile in to sell debt and investors look to lock in coupons before central bank monetary policy easing takes hold.
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Spurred by relatively cheap funding, companies have raised around C$4.7 billion ($3.5 billion) through non-investment-grade debt sales so far this year, the second fastest pace of issuance since at least 2017, according to data from National Bank of Canada and Bloomberg.
The high-yield frenzy is feeding investors who have been pouring money into increasingly risky assets to soak up yields, a trend that’s likely to accelerate as the Bank of Canada goes further down the path of interest rate cuts and the Federal Reserve follows with its own easing.
The junk bond revival in Canada ironically hit fever pitch after Videotron, a major source of loonie junk bonds, snagged a status change 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 big junk bond seller in Canada with more than C$3 billion outstanding bonds at that time, based on data compiled by Bloomberg.
Canada’s junk bond market is a small world — issuance for the year is still only about 1.5% the size of its southern neighbor even with the recent growth, according to data compiled by Bloomberg. Videotron’s exit sent its bond holders scrambling for replacements, creating an opportunity for new and existing issuers, according to Sean St. John, an executive vice president and managing director at National Bank Financial.
Junk bond issuers have moved to “accelerate funding plans, opportunistically refinancing existing debt and extend maturity profiles,” said Rob Brown, co-head of debt capital markets at Royal Bank of Canada.
For firms selling debt, funding costs stand at their lowest level since 2022.
An inverted yield curve — where short-term debt is more expensive than long-term — for most of the year has also incentivized sellers to term out short-dated bank debt into the high-yield market, according to Brown and his co-head at RBC, Patrick MacDonald.
High-yield coupons have compressed so much that they’ve become relatively competitive with bank loan pricing at the moment, National Bank’s St. John said. “A lot of issuers are weighing the value of diversifying their debt capital and issuing longer term, covenant-light paper at little to no premium, and even in some cases at more attractive rates than the banks are offering them,” St. John told Bloomberg.
For buyers, the enthusiasm comes from expectations that interest rates have peaked and the time to lock in yield is now, according to Brown and MacDonald. The Bank of Canada has cut interest rates three times since June to 4.25%, while cooling inflation is paving the way for even deeper cuts.
The relatively small size of the Canadian junk bond market has its advantages too: it could mean a lower barrier of entry for companies looking to raise a limited amount of debt.
ATS Corp., an Ontario-based equipment maker and a repeat issuer in the US, chose to sell loonie denominated debt in August because it didn’t have the funding needs for a benchmark-sized US dollar deal, according to St. John. The average tranche size of this year’s Canadian dollar deal is C$311 million, according to National Bank of Canada data, significantly lower than the US market.
Yet another factor that makes it a perfect storm for high yield issuance is the robust fund flows into fixed income, which has led to strong appetite for new issues, according to St. John.
“Investor receptivity has been phenomenal,” said St. John. “I think there’s more liquidity in the secondary market than there ever has been.”
–With assistance from Reshmi Basu, Daniel Covello and Esteban Duarte.
(Updates with fund flow information in penultimate paragraph. A previous version corrected the size of high yield issuances throughout.)
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