May 13, 2016 / 5:07 PM / in 2 years

Investors warm up to Alberta government bonds after wildfire

TORONTO, May 13 (Reuters) - Portfolio managers see value in Alberta government bonds after a massive wildfire in the oil sands region spooked investors already worried by the Canadian province’s oil-related contraction and rising deficit.

Alberta traditionally has been able to tap the bond market at a lower cost than its bigger provincial counterparts, Ontario and Quebec. But that has been up-ended by the roughly 60 percent drop in oil prices since June 2014.

The province’s bonds have underperformed those of its peers as the oil collapse devastated the economy. Alberta’s gross domestic product shrank 4 percent last year and its new left-leaning government has projected higher deficits for this year and 2017 as well as a surge in borrowing.

The yield on Alberta’s 30-year bond traded at 3.21 percent on Friday, 21 basis points above Ontario, with the spread having widened 3 basis points since the wildfire broke out last week, cutting oil sands output.

But portfolio managers expect the province to have the financial strength to overcome the crisis, noting its low stock of debt and ability to introduce a sales tax if oil prices don’t recover.

“Any near-term weakness attributed to news of the fire situation will likely be temporary, and minor in the big picture,” said Brian Calder, senior bond trader at Franklin Bissett Investment Management.

The lost oil production will certainly weigh on Alberta’s economy in the second quarter and the province is already in the crosshairs of ratings agencies. Moody’s Investors Service last month became the latest agency to downgrade Alberta, stripping the province of its Aaa credit rating.

Investors, however, expect wildfire-related costs to be shared with the federal government and insurance industry and see rebuilding efforts adding to economic growth later in the year.

“For long-term holders there is value in Alberta’s bonds,” said Hosen Marjaee, senior managing director for Canadian fixed income at Manulife Asset Management. He prefers them to bonds issued by Ontario, Quebec and British Columbia.

Alberta’s financing requirement has jumped 38 percent to C$14.1 billion this fiscal year and is set to climb further in 2017-2018, while its debt as a percentage of GDP is projected to rise to 15.5 percent in 2018-2019. In comparison, Ontario’s debt is more than 40 percent of its GDP.

“If you look at Alberta relative to other quasi-sovereign credits around the world, it’s in very, very good shape,” said Ed Devlin, head of Canadian portfolio management at Pacific Investment Management Co.

“They don’t have the investor base that the larger provinces have ... so those investors have to start to feel comfortable with Alberta and the volatility associated with commodity prices,” he added. (Reporting by Fergal Smith; Editing by Paul Simao)

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