Canadian investment in foreign securities has been driven to record-breaking highs, and it is all down to the insatiable hunger for Maple bonds.
These Canadian dollar-denominated bonds issued by foreign borrowers have taken off in the past two years, following the lifting of limits on what domestic investors are allowed to hold in foreign investments.
This year more than 50 per cent of issuance in Canada has been through these assets, bankers say.
The demand for Maple bonds also drove Canadian investment in foreign securities to a record C$78.3bn in 2006, up from C$51.6bn the previous year, according to a report by Statistics Canada released last month.
Three elements continue to drive the Maple market: issuers looking for investor diversification; cost-effective funding; and ease of execution.
These create a market that is attractive for foreign borrowers.
“The Canadian economy has been quite robust, and the government has been running a surplus for the last few years, which helps immensely,” says Chris Seip, of RBC Capital Markets.
“On the other hand, Canadian investors are looking for issue diversification and are looking to participate in higher-yielding issuers of good credit quality.”
In 2001, the Canadian government increased the amount registered retirement savings plans were allowed to hold of their total book value of assets in foreign investments from 10 per cent to 30 per cent.
In February 2005, it went further by announcing the removal of this limit entirely.
By scrapping the Foreign Property Rule (FPR), which had been in place since 1971, it has given Canadian investors greater scope for buying foreign assets.
Already this year the Maple bond market has discovered new strength.
Domestic supply was extremely light, and there were increasing numbers of investors participating in the Maple market – including a transaction struck in February between RBC Dominion Securities and Morgan Stanley valued at C$2.5bn.
This deal marked the largest domestic multi-tranche corporate bond issue in Canadian history, underlining the current keen interest in the Maple market.
“The success of this transaction shows that the Maple market has a healthy appetite for both high-quality issuers and sizeable issues,” says Larry Bates, of RBC Capital Markets.
“As a result, we’re seeing a great deal of interest in Maples by global issuers. These borrowers view Canada as a great market for accessing financing.”
Iceland’s Kaupthing Bank made its inaugural step into the Maple bond market in February this year with a C$500m bond issue, and says it was an impressive experience.
Maple bonds offer Kaupthing the funding diversification they are looking for, and is one of the main reasons there is foreign interest is this market.
“You get a completely new investor base, which is a very good benefit for Kaupthing Bank,” says Eirikur Jensson, head of funding at Kaupthing.
“Although we were newcomers to that market, it also provided us with competitive pricing.”
Kaupthing Bank is a satisfied borrower in the Maple bond market, and with their funding strategy being split into one-third in the European markets, one-third going to the US markets, that leaves one-third to explore other options.
The bank plans on committing between C$300m and C$700m to the Maple market in the future.
“We don’t want to be a one-hit wonder to the Maple bond market,” says Mr Jensson.
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