Canadian borrowers took advantage of buoyant US capital markets over the first nine months of 2021 to raise capital at attractive rates and on favorable terms.
US high yield bond markets proved especially attractive for Canadian issuers, with issuance for the year to the end of Q3 2021 coming in at US$20.4 billion, according to Debtwire Par. This is more than a third up on the US$15.2 billion raised by Canadian high yield borrowers over the same period in 2020 and double the pre-pandemic levels observed in 2019.
High yield deal count for Canadian issuers is also up, rising to 33 deals over the first nine months of 2021 from 23 deals and 17 deals during the same period in 2020 and 2019, respectively.
Core sectors drive high yield uptick
With the Canadian economy still rebounding from COVID-19 (the IMF forecasts GDP growth of 5.9% in 2021 and 4.9% in 2022), the country’s key mining, energy, transportation and chemicals & materials sectors were the major contributors to the year-on-year growth in US high yield issuance by Canadian borrowers.
These core sectors were direct beneficiaries of rising demand for commodities, as mothballed economies around the world reopened and prices for raw materials spiked. Steel and aluminum prices climbed to decade-highs in 2021 and oil prices almost doubled in the past year. Transport costs saw a similar uplift, with Statistics Canada recording all-time high levels of inflation in transportation prices. Global prices for chemicals and plastics are also hitting record highs.
These macro-economic factors have seen chemicals & materials rank as the largest sector for high yield issuance at US$3 billion, followed by transportation (US$2.4 billion), energy (US$2.3 billion) and mining (US$2.1 billion).
Refinancing and acquisition financing
Refinancing made up the bulk of high yield issuance by Canadian issuers in the US so far in 2021, reaching US$13.8 billion by the end of the third quarter and accounting for more than two-thirds of overall issuance during that period.
As seen in wider high yield bond markets, this refinancing activity was especially robust in the first half of the year as issuers took advantage of strong investor appetite to refinance existing borrowings at attractive prices, pay down debt and push out maturities.
Eldorado Gold, for example, secured a US$500 million high yield bond in August, priced at 6.25% and maturing in 2029. The capital will be used to redeem its US$234 million senior secured second lien notes maturing in June 2024, priced at 9.5%, and to repay an existing term loan and revolving credit facilities.
Acquisition financing was the next largest use of proceeds, with US$2.7 billion of issuance. Notable deals included Stone Canyon Industries raising a US$1.8 billion high yield bond to pay down a second lien term loan facility and fund its US$3.2 billion acquisition of the Americas salt business of K+S, the German chemicals, potash and fertilizer producer.
The outlook for further M&A issuance is positive, with Canadian M&A markets making strong gains through the course of 2021. According to Mergermarket, M&A value involving Canadian targets totaled US$113.3 billion in the first nine months of 2021, surpassing the full-year totals posted in the three previous years. Recently announced deals involving Canadian targets—including Agnico Mines backing Kirkland Lake Gold in a US$11 billion deal and Blackstone REIT acquiring logistics property manager WPT Industrial in a US$3.2 billion transaction—have populated a strong pipeline of potential upcoming M&A financing opportunities.
Hot domestic loan market sees issuers keep it local
Although Canadian borrowers seized the opportunity to access deep US high yield markets, loan issuance by Canadian companies and private equity firms in the US was limited.
According to Debtwire Par, only five Canadian borrowers secured leveraged loans in the US so far this year, with total value of US$1.6 billion. This is down significantly year-on-year—during the same period in 2020, 39 Canadian issuers raised US$14.8 billion in the US.
One possible explanation for the drop off could be that Canadian borrowers were able to cover all their loan needs domestically, where conditions were very favorable, but continued to turn to deeper US high yield markets when opting for bond issuances.
According to analysis by EY, the domestic Canadian loan market has been strong and active this year. There has been fierce competition between well-capitalized bank and non-bank lenders to service company capital requirements, with low interest rates and low default rates giving lenders the confidence to pursue deals.