Corporate issuance surged with central bank moves, but official data points to a reckoning ahead
Confronted with the impact of COVID-19, Canadian companies rushed into the bond market at a record pace in the first five months of the year.
According to an analysis by Reuters, corporate bond issuance in Canada spiked 22.5% from January to May, with total issuances reaching $78.4 billion. That represented the heaviest rate of issuance in at least a decade, reported the news outlet.
The binge in bonds comes amid a wave of unprecedented shutdowns that’s swept across wide swaths of the Canadian economy. While businesses are reopening at a staggered pace, many are not operating at pre-COVID-19 levels, and the danger of a second wave of infections could stall the recovery.
“You don’t want to be caught in a situation when you do need the access to capital markets and they’re closed off to you,” Barry Schwartz, chief investment officer at Baskin Wealth Management, told Reuters.
Among those raising cash through debt were banks, miners, energy firms, retailers, and real-estate firms. Brad Meiers, head of debt capital markets and syndication at HSBC Securities, use of the debt varied between pre-funding and paying down lines of bank credit, which would give companies more room to borrow in case they would need more liquidity in the near to medium term.
Recent actions by the Bank of Canada have likely helped encourage companies to tap the debt markets. In March, the central bank made emergency cuts to bring interest rates down to near zero; shortly thereafter, it stepped into uncharted economic territory with its first large-scale asset-buying program.
The availability of cheap money could lead to a painful reckoning when all is said and done. Official data released on Friday showed the aggregate debt-to-equity ratio of private non-financial corporations spiked to 212% in the first quarter, the most since 2009.
“Leverage ratios are definitely a concern,” Benjamin Reitzes, a Canadian rates & macro strategist at BMO Capital Markets told Reuters. “There may be a hangover from all this.”
