Ratings agencies add to Alberta misery, but weaker bonds lure buyers

Wed Jan 27, 2016 4:56pm EST
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By Fergal Smith

TORONTO Jan 27 (Reuters) - Dour credit rating agencies and rising borrowing costs have added to Alberta's misery after a plunge in crude oil prices slammed its economy, but portfolio managers have sniffed value in the province's underperforming bonds.

Standard & Poor's stripped Alberta of its AAA credit rating in December, while Dominion Bond Rating Service (DBRS) and Moody's have revised their rating outlook to negative from stable.

The spread between the yield on Alberta's 10-year bond and the Government of Canada's 10-year benchmark has widened from 65 basis points nearly a year ago to 122.5 basis points on Wednesday, its widest since the oil shock began.

The province's bond prices are already trading well below the AAA rating, noted Brian Calder, senior bond trader at Franklin Bissett Investment Management.

"There is a lot of bad news already baked into current spreads," said Calder. "There is really good value there and we have been progressively adding to our position."

Alberta's left-leaning New Democratic Party government, elected in May, said in October it would borrow heavily to fund infrastructure in a bid to support the economy.

However, the expected increase in the bond supply has been largely reflected in the market, said Greg Nott, chief investment officer at Russell Investments Canada.

"We have been buying Alberta bonds. We do see some value at these levels and have been increasing our position," Nott added.   Continued...