Another reason to buy Canada
David Pett, Financial Post
Published: Tuesday, March 16, 2010
A huge wave of Canadian corporate debt that starts coming due in 2012 could have negative implications for stocks and bonds but the refunding onslaught will pale in comparison to the United States, giving investors yet another reason to buy Canada.
"In the U.S., an avalanche of non-financial corporate debt -- almost US$1.4 trillion -- is set to mature over the next five years," said Kevin Cassidy, vice president and senior credit officer at Moody's Investors Service.
"By contrast, Canadian corporate issuers have relatively low refunding needs -- both on an absolute dollar basis, and as a percentage of outstanding debt."
In a report published Wednesday, Moody's estimated that nearly US$75-billion in Canadian non-financial corporate debt will mature in the next five years, including US$57-billion of bonds and US$18-billion in bank credit facilities.
US$19-billion of the total coming due matures in 2010 and 2011, followed by a heavy load of maturities from 2012 to 2014 worth US$56-billion.
Mr. Cassidy said the total represents 25% of the roughly US$300-billion of outstanding Canadian debt.
In terms of annual new issuance of both investment grade and speculative grade debt, which has averaged a total of US$23-billion over the past 14 years, he said the amount coming due does not appear excessive.
"As with U.S. companies, new debt issuance in Canada should be able to cover Canadian issuers' maturities over the next few years -- as long as the economy remains steady and credit markets continue to recover," he said.
While immediate refunding needs are relatively modest, with just US$4-billion maturing in 2010 and US$15 billion in 2011. Mr. Cassidy said the greater refunding requirements in 2012-2014 carry more risk given the expectation that the Bank of Canada will begin to tighten monetary policy ahead of the U.S. Federal Reserve.
If companies do have a hard time refinancing that will restrain their ability to expand and invest and could increase default risk, putting pressure on bond and share prices.
"Still, our caution is somewhat offset by our expectation that Canada's job market will recover faster than that of the U.S., with hiring in Canada encouraged by business optimism and a relatively robust credit market," he said.
South of the border, the landscape for maturing debt is much more ominous.
Thanks to a frenzy of refinancing and leveraged buy out activity prior to the credit collapse in 2007, speculative grade maturities will total US$800-billion in the next five years. US$338-billion of that is due in 2014 alone, which is up from just US$21-billion this year.
At the same time, investment grade issuers have to refinance US$1.2-trillion in loans between 2012 and 2014, not to mention the U.S. government, who will need to borrow close to US$2-trillion.
With so much debt coming due at one time, Mr. Cassidy said one of the big concerns is whether the U.S. high yield market can continue to pump out new issues as it did in 2009 in order to fill the financing void left by banks.
He noted that roughly 60% of the maturities due in the United States between 2010 and 2014 is speculative-grade debt.
By comparison, the composition of Canadian maturities over the next five years is slightly biased towards investment-grade debt, with US$45-billion or 60% of the US$75-billion due, compared to US$30-billion or 40% of speculative-grade debt due by 2014.
"The Canadian mix of investment-grade and speculative-grade maturities is also more favorable than in the U.S., where speculative-grade maturities dominate," he said.
Photo By: Don Moorcroft
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