Thanks to the idiosyncrasies of its funding policy, Canada is a very rare butterfly in the international bond markets. So when there is a sighting, as there was last month, collectors become feverishly acquisitive, with highly satisfactory results for the issuer.
Canada has long been a classy AAA credit and the recent crisis has made it classier still. It has survived both crisis and recession in better shape than any other major developed economy, with a debt-to-gross domestic product ratio of 28%, the lowest of all G-7 countries by a considerable margin.
As a matter of policy, state spending and the deficit are financed entirely via domestic Canadian dollar borrowing. Foreign currencies are used exclusively to fund foreign exchange reserves, deployed in turn to promote orderly conditions for the Canadian dollar in FX markets. These are held in the Exchange Fund Account (EFA), made up mainly of US dollar and euro-denominated securities (roughly 50% of each), with some Japanese yen securities. They totalled $43.5bn at the end of the last financial year.
In recent years, funds for the EFA have been raised largely through cross-currency swaps of Canadian dollar borrowings, simply because they are cost-effective and easy to execute. They have also helped to maintain liquidity in the domestic bond market, which has been useful in an environment of lower financial requirements and, therefore, lower debt issuance.
A rare venture
Canada does, however, make the very occasional foray into foreign currency-denominated debt, the last of which was a $3bn global bond issue in September last year. The sovereign's euro-denominated paper is so rare as to verge on extinction. The last issues were so long ago that they were actually issued in legacy currencies and later converted to euro. Both now matured, they were a DM4bn 10-year issued in June 1996, and a FFr4bn 10-year issued in October 1998.
So when news broke that Canada was to start the new year with its debut euro-originated 10-year bond issue, there was much excitement among devotees of rarity and diversity. Only three other non-European supranational, sovereign and agency (SSA) borrowers have issued in euro since 2008 - the World Bank, Ontario and Quebec. As such, the joint leads to the issue - Bank of America Merrill Lynch, Credit Suisse, Deutsche Bank and HSBC - could justifiably promote it as providing unparalleled diversification away from eurozone sovereign AAA credits. And diversification was very much on Canada's mind as well. The plan was to diversify its foreign funding by employing a different tenor and currency from last year's US dollar issue.
The €2bn deal was announced on the first Tuesday of the year, and the idea was to launch and price on the Thursday, using the intervening day to market the issue and build a book. The price whisper was midswaps plus 5 basis points (bps) area. The comparable outstanding France 2019 issue was trading at midswaps plus 9bps. But interest was so intense that even before the end of that Tuesday, nearly €6bn in expressions of interest had been logged, from more than 100 accounts.
With that level of response, the issuer felt sufficiently encouraged to accelerate and compress the whole timetable by 24 hours, opening the books instead on Wednesday morning with by now official price guidance of plus 2bps to plus 5bps. "This represented the most aggressive pricing in the syndicated supra/sovereign space since early October 2007, at only Bunds plus 19bps to plus 22bps area," says David Barnabe, a spokesman for Canada's Department of Finance.
Early closure
In the short space of one and a half hours, the book ballooned to €11bn and guidance was revised to plus 2bps. "Given the extraordinary demand, at over five times oversubscription, the book was closed at 10.25am to avoid even further allocation headaches," says Mr Barnabe.
The final pricing represented a tighter spread versus Germany than any other outstanding SSA deal, including the key comparables of the Netherlands (plus 6bps on its current 10-year) and Finland (plus 9bps). By then there were 217 accounts in the book, almost all real money players and widely distributed across the globe. Allocations were made to 201 of them.
Canada's desired target was clearly outside North America, which was allocated only 3%. Continental Europe took 55%, the UK 22% and Asia a decent 19%. Fund managers had 44%, official institutions 22%, banks 17%, corporate/pension funds 5% and private banking 3%. While the swaps market will doubtless remain Canada's funding option of choice for foreign exchange, there may be a few more direct international issues than before.