RPT-BAY STREET-Canada debt issuance boom seen lasting into 2011

Mon Nov 22, 2010 7:15am EST

(Repeats Nov. 21 column without changes)

* Canadian corporate debt issuance at 2nd highest level

* Issuers capitalize on rates near historic lows

* High-yield bonds gain traction with investors

* Rising rates could end "charmed" situation

By Jeffrey Hodgson

TORONTO, Nov 21 (Reuters) - A post-crisis boom in sales of Canadian corporate bonds looks set to extend into 2011, delighting fee-hungry bankers and companies looking to lock in borrowing costs near historic lows.

Debt market watchers say high demand from income-seeking investors is behind the surge, as are interest and inflation rates that are expected to stay low for a long time.

"The growth will continue certainly. There's two sides to the equation, the investors and the issuers, and I think that investors have shown no sign of slowing down. Their appetite for new issue continues to be very strong," said John Tkach, head of Canadian debt capital markets at Scotia Capital.

Companies have raised C$67.2 billion ($65.9 billion) in the corporate debt market this year, topping the full-year totals for 2008 and 2009, according to Thomson Reuters data.

Even if companies sold no more debt, 2010 would be the second best year on record, after 2007's C$74.1 billion.

The reasons are plentiful. Bond yields have dropped sharply since the start of the year as the Canadian and U.S. recoveries faltered. Canada's 10-year government bond yield CA10YT=RR hit a 2010 low below 2.7 percent last month.

The Federal Reserve's decision to effectively print money to buy more bonds has helped Canada's bond market, amid broad expectations the Bank of Canada rate increases are over for now. [CA/POLL]

Investors, fearful of the gut-wrenching stock market falls seen during the worst of the financial crisis in late 2008, have clung to the relative safety of bonds.

"We're seeing a lot of inflows into fixed-income products, yield-oriented products, and we're not seeing those inflows into equity products," said Terry Carr, head of Canadian fixed income for MFC Global Investment Management, a unit of Manulife Financial Corp. (MFC.TO).

"Those flows generally, when they're going into products, are not targeting government debt. They're targeting corporate debt, corporate bonds. They're targeting yield products like high-yield bonds."

HUNGRY FOR INCOME, YIELD

Carr, who helps manage about C$16 billion in fixed-income assets, said investors are hungry for securities that can provide reasonable income in a low-interest rate environment.

"Everyone, when we're looking at the inquiries we get on products, is (asking) 'What can you do to enhance our yield and provide better total returns, while broadly speaking, being in the fixed-income space."

The demand has not been lost on companies looking to borrow. Spreads, the yield difference to government bonds, are higher than before the crisis. But they are near long-term averages, so many see issuing new bonds as inexpensive long-term financing.

Many companies also have painfully fresh memories of being unable to borrow at all when credit markets froze.

"No one ever wants to get into that situation again where you need funding and it simply isn't available. So even if you don't have an urgency for funding in 2011 ... why not partially fund or at least get that started?" said Michael Ho, senior vice-president, business development at rating agency DBRS.

The boom has boosted fees for top underwriters like RBC Capital Markets, a unit of Royal Bank of Canada (RY.TO). Foreign players in the sector include HSBC Holdings Plc (HSBA.L) and Bank of America's (BAC.N) Merrill Lynch arm.

But many bond market watchers say the corporate debt issuance boom is bound to slow as the economy picks up, interest rates rise and bond yields climb.

"The charmed existence we've had the last little while, it's not sustainable indefinitely. I think companies have been very wise at taking advantage of it," said Colleen Campbell, executive managing director, debt capital markets at BMO Capital Markets.

($1=$1.02 Canadian) (Editing by Janet Guttsman and Rob Wilson)

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