May 31, 2016 / 8:32 PM / a year ago

Newfoundland finds large buyer for province's beaten-down bonds

3 Min Read

TORONTO, May 31 (Reuters) - Canada's Newfoundland and Labrador province found a large buyer for the most recent sale of its bonds, which had been beaten down after the oil price plunge pushed the eastern province deep into deficit and raised the premium it pays to attract financing.

The province on Friday issued C$675 million ($514.83 million) of 6-year bonds, of which C$375 million was privately placed. The carve-out from the larger publicly placed deal indicated to market players that there was a large pre-order.

"Newfoundland has demonstrated that it is able to place bonds amongst larger investors," said Brian Calder, a senior bond trader at Franklin Bissett Investment Management.

The deal came as the province's bonds offered significant additional yield compared with other provinces, such as Ontario.

The spread on Newfoundland's 30-year bond has jumped to more than 50 basis points above Ontario's after having traded near flat before the collapse of oil production in Newfoundland led to a 2.3 percent contraction of its economy in 2015.

Friday's deal was priced at a spread of 108.5 basis points above the equivalent maturity Canadian government issue, according to IFR Markets, part of Thomson Reuters.

"We thought the spread was good," said Hosen Marjaee, senior managing director, Canadian fixed income at Manulife Asset Management, who participated in the deal.

The province can access taxation and in a worst-case scenario will be supported by the federal government, he added.

To be sure, concern about "fiscal erosion" last month triggered a downgrade of the province's credit rating in mid-April by ratings agency DBRS to A (low) from A.

However, the trend on the rating was changed to stable from negative because of the new Liberal government's commitment to take credible action.

The last provincial budget projected a narrowing in the deficit to C$1.8 billion 2016-17 from C$2.2 billion in the prior fiscal year as the government raised taxes and fees and cut spending. Brent crude oil has since blown past the $40 a barrel average price expected for 2016-17. The province is targeting a return to surplus in 2022-23.

Both the budget and the oil rally have been positive developments for the province's bonds, said Marjaee.

$1 = 1.3111 Canadian dollars Reporting by Fergal Smith; Editing by Dan Grebler

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