Dividend and income investors will likely see more volatile asset prices than they’re used to, but if they get the timing right, they could make strong, short-term returnsGetty Images/iStockphoto
Provincial debt is going global.
Canadian provinces have raised $19.2-billion in offshore credit markets this year through May, which is close to half of what they have borrowed in 2017, according to RBC Dominion Securities Inc.
That's a lot of money for a five-month period, and is roughly $2.6-billion shy of the total amount of provincial debt sold outside of Canada during all of 2016. Last year, 26 per cent of provincial bonds were issued in foreign markets. In 2015, it was 20 per cent.
The bulk of the bonds going abroad are being printed in U.S. dollars, with some in euros and Australian dollars, too. There has been a noticeable burst of activity earlier this year by four Canadian provinces in Britain, waking up a sterling market in which the provinces have been dormant since 2011.
This string of recent foreign transactions is part of a multiyear push by most provinces to diversify their investor base at a similar – and in some cases lower – cost of funding than they can get at home, allowing them to rely less on domestic buyers.
"The international investor base has been incredibly receptive to provincial debt," Alex Caridia, head of government finance at RBC in Toronto, said during an interview. "Canada – it's a good story."
Seen as quality public-sector borrowers, the provinces are offering attractive returns at a time when yields on government debt of more stable European countries are close to zero.
Investors in benchmark 10-year German government bonds, for instance, are receiving annual returns of just 0.27 per cent, while the 10-year British gilt yields a bit more than 1 per cent. Two-year national-government debt carries a negative yield in an array of European countries, including France, Germany, Sweden and Switzerland, meaning investors are paying to lend the government money.
That has helped to open up an opportunity for Canadian provinces. Recently, Britain's sterling market has been abuzz after a flurry of transactions by four of them.
In February, Alberta was first out of the gate to tap the British debt markets, marking the oil-rich province's first-ever sterling deal and the largest to date by a Canadian province. But the British market really came alive last month: Ontario raised money in pounds for the first time since 2011. Quebec did an issue of its own, returning to Britain after a hiatus of almost 21 years. And Manitoba also took the leap one day after Quebec did, with its inaugural sterling offering.
In total, the provinces raised £1.8-billion, or about $3.1-billion (Canadian), from dozens of big investors, including from Britain-based asset managers, insurers, pension funds, banks and central banks.
For Ontario, which printed about $880-million in new debt in the sterling market in May, accessing a new pool of global investors was a main draw.
"The recent sterling debt was issued at costs comparable to domestic funding, but it brought in new investors who have not bought Ontario bonds before," said Scott Blodgett, a spokesperson for the Ontario Ministry of Finance. The deal was in line with the province's strategy of broadening its investor base, he added.
"If you've got a large program and you keep going back to the same investors, they can get full on your name," said Bradley Meiers, head of debt capital markets at HSBC Bank Canada, which worked on three of these sterling deals. "By going to new investors, you're going to investors that wouldn't have exposure to those provinces."
Tapping foreign markets puts less pressure on Canadian investors to shoulder the entire burden of the provinces' sizable yearly borrowing programs. And when the provinces take some supply out of Canada, it helps keep a lid on their spreads at home where they otherwise might have widened, added Mr. Caridia, whose team at RBC helped all four provinces bring their sterling deals to the market.
Even if demand for provincial bonds exists offshore, the pricing has to make sense.
In any offshore bond offering, the provinces would consider the costs of borrowing at home versus abroad, as well as the price to convert the funds back to Canadian dollars. They work with a bank to hedge against the foreign-currency risk through a swap, as opposed to leaving the provincial treasury exposed to currency fluctuations.
This year, credit spreads have shifted in such a way that these issuers have ended up in a favourable position after swapping back from British pounds.
"But there's more to it than that, because you can't just pick up the phone and do a deal," added Mr. Caridia. "You have to make sure it's a successful deal because that will allow you to re-access the market over and over again. In times of stress, you'll have a lot of different outlets to go back to."