CAPITAL MARKETS REPORTER
Canada may finally be seeing the emergence of a high-yield market after many false starts, with successful sales by companies such as Baytex Energy Trust and Viterra Inc. demonstrating that investors suddenly have a big appetite for this riskier slice of the debt world.
For years, bankers have talked about creating a market for the bonds, which are usually issued by companies lower down on the credit-rating spectrum. As a result, they generally pay a higher yield, or interest rate, than other bonds.
However, there has not been much action.
That's changing, which is opening up the ability to raise money in Canada to a new group of companies.
Both the $150-million sale by Baytex and the $300-million sale by Viterra met hot demand from Canadian investors seeking a combination of income and stability. Baytex had orders for about $450-million.
When Baytex last sold debt six years ago, it was in the United States because there was no market in Canada, said chief financial officer Derek Aylesworth.
With those bonds coming due, the oil and gas producer again looked at the United States. However, it found that investors in Canada were willing to pay more because they were familiar with Baytex, often because they had followed its shares.
"They were more willing to listen to the story," he said.
For years, Canadian companies like Baytex that wanted to issue high-yield debt largely looked to the United States and its thriving $1-trillion (U.S.) market for the bonds.
In Canada, there were few buyers, with most investors focusing on highly rated debt.
Now, with the sun setting on income trusts in 2011, many investors are seeking income alternatives - and starting to pay attention to these issues.
"The stars are aligning for a legitimate Canadian-dollar high-yield market growing up," said Barry Allan, a bond veteran who oversees the Marret High Yield Strategies Fund.
They're also seeking investments that are more stable after a volatile year in the stock market, and looking for ways to profit even in a sluggish economy that may hamstring returns in stocks.
It also hasn't hurt that the bond market has had a headline-grabbing run of record returns in 2009.
As a result, money is flowing into high-yield bond funds aimed at retail investors and even some traditional equity-focused investors are ramping up their bond expertise.
"The portion of income in the average asset allocation is going to go up," said Chris Seip, head of the department that underwrites Canadian bond sales at RBC Dominion Securities.
Other factors pushing companies to issue in Canada, bankers say, are linked to lack of access to bank credit. Companies that can no longer get long-term loans from banks are selling bonds. The lack of credit is an obstacle to swapping U.S. debt obligations to Canadian dollars using a derivative.
As a result, "the seeds [of a high-yield market] in Canada are permanent," Mr. Seip said.
Many companies that will be able to sell are "champions" in their sector, but because their industry is cyclical or challenged, find it tough to get a top credit rating, he said.
Still, bonds are a different world for many investors, so there is a learning curve.
Bonds don't trade on an exchange, making it tougher to get prices, and given that the market will be relatively small, it may be hard to find a buyer when it's time to sell.
Bankers like Mr. Seip say they will help by buying or selling bonds they underwrite.
Such support will be crucial for the market to have staying power, fund managers say.
"A viable Canadian high-yield market has a real chance of succeeding this time around, although it faces a number of challenges," said Geof Marshall, a portfolio manager who specializes in high-yield debt at Signature Global Advisors, an arm of CI Investments.
"The banks and dealers need to be committed to it and, to be honest, they do not have a good track record here," Mr. Marshall said.
Mr. Aylesworth of Baytex said that the reception his company got signals the market is on its way this time.
"If we had a need tomorrow to raise $150-million or even $200- or $300-million, we wouldn't hesitate to come back to the Canadian high-yield market," he said.
© The Globe and Mail
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