Tuesday, July 29, 2008

Maple bond market goes stale

(Globe & Mail Streetwise) Tim Hortons may be able to sell maple-covered donuts, but investors are turning up their noses at Maple bonds, made-in-Canada debt that was flying off the shelves until credit crunch hit.

Maple bonds - Canadian dollar-denominated debt sold by foreign companies - were all the rage through 2006 and the first half of 2007. With rates low and domestic investors hungry for diversity, more than $10-billion of new Maple issues were sold in each of the first two quarters of last year, according to statistics released Monday by the Investment Industry Association of Canada (or IIAC).

Then came the credit crunch, and Maple bond underwriting fell to a “dismal” $500-million of issues from four companies in the first three months of 2008, according to the IIAC, down 79-per-cent from the previous quarter and 96-per-cent from the same quarter last year.

“Investor appetite for less recognizable foreign names, particularly in the banking sector, has diminished,” noted the IIAC commentary on these grim statistics.

RBC Dominion Securities and Merrill Lynch are the only houses to bring Maple bond issues to market in 2008, according to data supplied by Bloomberg.

Dealers took justified pride in building the corporate bond market in Canada, dedicating employees and resources to Maple issues. Unless credit conditions improve, much of this infrastructure will vanish, as bond financers and traders will be redeployed or laid off.

New issues of government debt also declined, partly reflecting the fact that many provinces and the federal government were actively raising money last year, when rates were near historic lows. IIAC statistics show total government bond underwriting fell 22.8-per-cent, to $23.3-billion, over the first three months of the year.

Overall fixed income issuance fell to $41.4-billion in the first quarter of 2008, down 18 per cent from the previous quarter and 11-per-cent from the first three months of 2007.

The one salvation in these statistics for fixed income-focused dealers - that's all the bank-owned firms - is that IIAC data shows bond trading remains relatively stable, up 5.7 per cent in the first three months of 2008 from the previous quarter.

RBC Dominion Securities is the No. 1 underwriter of both Canadian corporate and government debt so far this year, Bloomberg league table data shows.

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