Canadian businesses went on a borrowing binge in the second quarter.
Corporate debt deals totalled $35.1-billion between April and June, financial data service Refinitiv said in a report to be released Wednesday, nearly doubling the $17.9-billion borrowed during the same period in 2023. The figure represents the second-highest quarterly debt issuance in at least 12 years, surpassed only by the lending frenzy of mid-2020 as companies stockpiled cash in response to the COVID-19 pandemic.
Much of the activity in recent months is also being driven by businesses bracing for the unexpected.
“We have seen a healthy amount of prefunding activity given some uncertainty on the horizon, notably with respect to the election coming up in the U.S.,” said Rob Brown, co-head of debt capital markets for RBC Capital Markets, the top investment bank for debt issuances in the first half of 2024. “There is the possibility of maybe some volatility in connection with that event in November and we have all these other geopolitical situations going on as well.”
Similar concerns, however, are also slowing the recovery of long-stagnant stock sales and merger and acquisition activity.
Stock sales amounted to less than $4.5-billion in the second quarter, a 7.2-per-cent improvement from the same period in 2023, though still less than half the 10-year average of over $10-billion.
Deal-making, meanwhile, continued to decline with M&A involving Canadian businesses totalling $63.3-billion in the quarter, 1.8 per cent lower on a year-over-year basis and more than 4 per cent below the 10-year second-quarter average.
Nitin Babbar, global co-head of equity capital markets at RBC Capital Markets, which was also the top investment bank for stock deals in the first half of 2024, said there was “indigestion in markets early this year where people expected rates to come screaming down, and that was more hope than it was science I think, so now we’ve had a reset.”
Businesses also have less of a need to raise money by issuing new shares because their balance sheets are generally in good shape, he said, allowing them to focus more on returning capital to shareholders in the form of buybacks and dividends.
“I am not concerned necessarily that the volumes are not as big as one would have expected or hoped for – we think that comes. We think that the overall tone for the market is good,” Mr. Babbar said. “The most important reason why we think it comes is because of M&A – we do think that the M&A side of the tape is going to improve with the rates coming down.”
Jeremy Fraiberg, co-chair of the mergers and acquisitions practice at Osler, Hoskin & Harcourt LLP – the top legal adviser for M&A in Canada during the first half of 2024 – also thinks M&A is going to rebound, just not before the economic uncertainty surrounding the U.S. election is resolved.
“So much of this is a confidence game,” Mr. Fraiberg said in an interview. “Sentiment is not great, and because M&A is a product in some way of that sentiment, until that really changes you can expect to see some lag. But there are good reasons to believe that it will change and maybe much more will be cleared up after the U.S. election.”
The second quarter included the largest corporate bond offering in Canadian history: Calgary-based TC Energy Corp.’s TRP-T $7.15-billion refinancing of its existing construction loan for its Coastal GasLink pipeline. Mr. Brown said the fact that investors were able to absorb that deal speaks to the current strength of the Canadian corporate debt market.
“When it came, everyone was sitting on the sidelines thinking ‘Oh my goodness, this is going to create a significant amount of indigestion; is the Canadian market big enough to absorb a deal of this size? Will the market be shut for two weeks as everyone digests this and frees up room to buy more bonds?’ But that wasn’t the case. It was a market-clearing event and we had a deal done later that week and we have seen a lot more since then,” he said.
Once the uncertainty related to the coming U.S. presidential election is resolved, and especially if M&A activity starts to rebound, Mr. Babbar said falling interest rates and lower inflation should also give equity markets a boost.
“That is where we are more optimistic,” he said. “And I think it is strategic optimism here and not just hope.”