6 minute read 27 Aug. 2021
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Canadian Capital Markets Briefing – Q2 2021 update

By Bill Wu

EY Canada Capital Markets Consulting Partner, EY Private

Driven leader with a passion for understanding business needs and providing tailored solutions.

6 minute read 27 Aug. 2021
In brief
  • Capital providers, both banks and non-banks, are well capitalized and aggressively looking at placing capital.
  • Private debt remains strong, but due to the competitive bank market some providers are seeking capital outside traditional lenders.
  • Given the momentum from more businesses reopening and restrictions easing, Q3 2021 is expected to exhibit a stronger performance.

After the third wave of COVID-19 and as the economy reopens, we should see the market continue on an upward trajectory. According to the Bank of Canada (Boc) recently released Monetary Policy Report, the Canadian economy is expected to grow approximately 6% in 2021 and more modestly, at 4.5% and 3.5% in 2022 and 2023, respectively. Inflation is expected to remain at 3% or above for the remainder of 2021 due to temporary factors as a result of the pandemic, but it’s expected to ease to 2% in 2022.

On July 14, 2021, the BoC held its target overnight rate at 0.25%, where it’s been since the start of the pandemic in Canada. The BoC adjusted its quantitative easing bond buying program which is reduced to a target of $2 billion per week. The BoC noted that global GDP growth is expected to reach 7% in 2021 as the economy recovers strongly with continued progress on vaccinations.

Given the momentum from more businesses reopening and restrictions easing, Q3 2021 is expected to exhibit stronger performance primarily due to vaccine rollouts, increased consumer confidence, with expected increases in spending on services such as transportation, recreation, and food and accommodation.

The bank lending market continues to be robust and hyper competitive for new lending arrangements. The alternative lending space presents an opportunity for businesses to access providers and continues to support existing customer needs while liquidity/capital continues to be strong and pricing remains relatively inexpensive. 

Capital providers, both banks and non-banks, are well capitalized and aggressively looking at placing capital. In certain cases, credit criteria have loosened, as is evident by leverage profiles and as lenders move away from disciplined lending to single- and two-covenant structures.

Private debt remains strong. However, due to the competitive bank market, some providers are seeking capital outside traditional lenders.

Default rates declined to 1.3% and yields are declining given the competitive market. High-yield secondary spreads are declining to what we typically see in senior debt levels. With the abundance of liquidity in the markets, it’s not surprising leverage multiples are being pushed up as compared to pre-COVID-19 levels, with large corporate at 5.3x and middle market at 6.0x.

Leveraged loan and high-yield secondary spreads(1)
EY - Leveraged loan and high-yield secondary spreads

(1) As of June 30, 2021

Source: S&P LCD Comps

Appendix - Leverage Loan Conditions

Leverage Multiples
EY - Leverage Multiples

Source: S&P LCD Comps

LTM default rate by principal outstanding
EY - LTM default rate by principal outstanding

Source: S&P LCD Comps

Loan fund flows
EY - Loan funds flows

Source: S&P LCD Comps

Loan volume by purpose
EY - Loan volume by purpose

Source: S&P LCD Comps

In Q2 2021, high-yield corporate bond yields have continued to decline, reflecting a recovery in the market. The spread between equivalent-maturity government bonds and corporate bonds further reduced during Q2 2021. Companies can take advantage of low rates to refinance existing bonds and secure capital to fund future investments.

S&P Canada bond yield index
EY - S&P Canada bond yield index

Source: S&P data

The following graph represents the spread of Canadian dollar swap rates over 3m banker acceptance rates. While locking into long-term rates has increased recently, they are still low relatively speaking.

Swap Rates - Act/365 Semi vs 3M BA - CAD
EY - Swap Rates - Act/365 Semi vs 3-month BA - CAD

Source: Capital IQ

Canadian debt capital markets

Canadian loan issuance
  • Q2 2021 recorded a ~68% increase in loan borrowings from the prior quarter, reaching to C$86.1b as market uncertainty started to diminish.
       
  • March 2021 reported record-high issuances, the highest since January 2020.

  • Almost 83% of the total issuances were used for general corporate purposes, followed by acquisitions, including takeovers and buyouts (~9.0%) and project finance and real estate financings (~4.0%).

  • Out of C$86.1b of total loans, ~C$2.1b will be maturing within the next 12 months.

  • Issuances are dominated by the power and utilities sector, followed by telecommunications and oil and gas.

  • Loan issuances for first half of 2021 were almost the same as all of 2020, indicating a strong appetite in the lending market.
Canadian loan issuances, Q2 2019 to Q2 2021
EY - Canadian loan issuances, Q2 2019 to Q2 2021

Source: Loanconnector

Canadian loan issuances, 2013-YTD 2021
EY - Canadian loan issuances, 2013-YTD 2021

Source: Loanconnector

Canadian bond market

The Canadian bond market recorded ~C$7.0b lower corporate issuances in Q2 2021, as compared to the prior quarter witnessing a 22% drop in volume.

  • Volumes in 2021 so far are constrained by the fact that the majority of companies have sufficient liquidity owing to precautionary borrowings started in March 2020.

  • June 2021 recorded greater issuances in the quarter led by the power sector followed by financials.
Canadian bond issuances, Q4 2018 to Q2 2021 (*)
EY - Canadian bond issuances, Q4 2018 to Q2 2021

* Q1 and Q2 2021 numbers exclude T-Bills issuances

Source: Thomson Reuters

Canadian interest rates and bond yields

CDOR prices
EY - CDOR prices

Source: Bloomberg

On July 14, 2021, the BoC held its target for the overnight rate at the effective lower bound of 0.25%. As the Canadian economy recovers, it’s expected to reach a target inflation rate of ~2% in 2022, and therefore many expect an increase in rates in the second half of 2022 and/or early 2023.

Canadian benchmark bond yields
EY - Canadian benchmark bond yields

Source: Bloomberg

  • COVID-induced contractions in benchmark yields continued until December 2020, but yields have shown an upward trend since January 2021, supported by governments’ liquidity infusion programs.

  • Yields on 10-year government bonds have declined by about 20bps since April 2021. Moreover, long-term yields are expected to advance further as the economy recovers, supported by market pricing-in expected rate hikes in 2022-23.

US bond market 

US high-yield bond market
US high-yield bond value and volume Q2 2019–Q2 2021
EY - US high-yield bond value and volume Q2 2019–Q2 2021

Source: S&P LCD Comps

  • High-yield issuance for Q2 2021 totalled $137.1b, but ~8.0% lower than Q1 2021. The issuance volumes this year are expected to outpace the previous year’s issuances with record highs.
          
  • YTD 2021 recorded ~34% increase in issuances to $286.3b from $213.0b in the same period last year. The $137.1b of issuances for Q2 2021 was moderated from a record-high quarterly amount of $149.2b for Q1 2021.
       
  • The high-yield market is expected to remain robust in the coming months as issuers are looking to refinance existing debt at lower borrowing costs.
  • Capital structure revamps remain the driving force for the majority of issuances. Refinancing contributed ~62% of the total volume of high-yield transactions in Q2 2021 and ~71% in YTD 2021. Airlines and leisure travel/cruise companies remained the lead borrowers.

US investment-grade bond market

US investment-grade bond value and volume Q2 2019-Q2 2021
EY - US investment-grade bond value and volume Q2 2019-Q2 2021

Source: S&P LCD Comps

  • High-grade issuances recorded $352.7b in Q2 2021, a decrease of 47.2% in value compared to Q2 2020. High-grade volume in Q2 2020 set the high records as the Federal Reserve rolled out its corporate liquidity programs in March 2020.
       
  • General corporate purpose activity contributed 53% of the total volume in YTD 2021, while refinancing-driven issuance contributed 30%. M&A activity is steadily increasing, with $115.5b of M&A-related issuances in Q2 2021 as compared to $76.9b in Q2 2020. Verizon Communications and AT&T were the lead issuers.
What should companies consider?

In this robust market we’re seeing companies executing on the following priorities:

  • Refinancing today’s debt to longer-tenured debt to solidify low interest rates.
  • Increasing debt capacity to assist with pent up/deferred strategic spend around acqusitions and capex investments.
  • Renegotating to simpler, less restrictive covenants.
  • Taking advange of the debt captial structure in the US since it’s not readily available in Canada.

If you have questions about whether the information in this article applies to you and your business, give us a call.

Contact us

To learn more, contact:

Bill Wu
Partner, Senior Vice President and National Leader, Capital Markets, EY
+1 416 943 2545 | bill.wu@ca.ey.com

Roger Leslie
Vice President, Capital Markets, EY - Ontario
+1 416 941 1811 | roger.f.leslie@ca.ey.com

Barkin Sayiner
Vice President, Capital Markets, EY- Ontario
+1 416 943 3890 | barkin.sayiner@ca.ey.com

Eric Cassir
Vice President, Capital Markets, EY– Québec
+1 514 232 3964 | eric.cassir@ca.ey.com  

Kun Nie
Senior Associate, Capital Markets, EY – Ontario
+1 416 943 3393 | kun.nie@ca.ey.com
 

This publication contains information in summary form, current as of the date of publication, and is intended for general guidance only. It should not be regarded as comprehensive or a substitute for professional advice. Before taking any particular course of action, contact Ernst & Young or another professional advisor to discuss these matters in the context of your particular circumstances. We accept no responsibility for any loss or damage occasioned by your reliance on information contained in this publication.

Summary

Given the momentum from more businesses reopening and restrictions easing, Q3 2021 is expected to exhibit stronger performance primarily due to vaccine rollouts, increased consumer confidence with expected increases in spending on services such as transportation, recreation, and food and accommodation.

About this article

By Bill Wu

EY Canada Capital Markets Consulting Partner, EY Private

Driven leader with a passion for understanding business needs and providing tailored solutions.