Wake-up call for Canada’s bond investors

Investors might have to wait another 30 years before they get their money back from insurer

There has been a rude awakening for bond investors in Canada after insurer Great West Lifeco Inc. decided not to exercise an option to pay back one of its US dollar bonds early.

According to a Bloomberg report, the money Great West borrowed back in 2006 will now not need to be repaid until 2046 as the interest will move from fixed to floating rate. Indeed lenders could even see coupon payments slashed by more than half should market rates stay where they are.

With the report commenting that investors who thought they would wait around 30 days to get their money back from the insurer now potentially having to wait around 30 years, it suggests that investors now have fears about the C$45 billion they lent to the country’s financial sector.

Speaking to Bloomberg, James Dutkiewicz, chief investment strategist at Sentry Investments, commented that the move is a “wake-up call”.

The decision by Great West is a rarity with a Canadian financial institution choosing not to take an early-call option. Now fears are manifesting that other bonds are adjusting for the long term.

Commenting to Bloomberg, Marc Godried, chief investment officer at Canoe Financial, said that “Canadian investors never believed a Canadian bank or issuer would do that kind of thing in Canada.” He believes it creates a risk factor on other bonds and with any Canadian company that has this level of outstanding debt.

Though many US companies have opted not to call these hybrid notes there was a general perception in Canada that fixed-to-floating rate notes would be recalled and help maintain borrowing costs at a low level.

In a statement, Marlene Klassen, a spokeswoman for Great West, commented: “When companies within the Lifeco group make decisions on capital and capital instruments, they do so on a case-by-case basis for each specific capital instrument under consideration.”