November 1, 2017 / 7:14 PM / 2 years ago

Investor demand boosts Canada maple bond outlook, case for index inclusion

TORONTO, Nov 1 (Reuters) - A jump in maple bond issuance this year is improving chances the instruments will be added to a key benchmark debt index, with more foreign companies expected to tap the Canadian dollar debt market as investor interest in diversifying holdings drives demand, some fund managers said.

A slew of global companies, including Apple Inc, McDonald’s Corp and Walt Disney Co, have set the maple bond market on fire, with year-to-date issuance of C$15 billion ($11.6 billion), triple that of last year.

The flurry of maple bonds - Canadian dollar-denominated debt issued by foreign companies - is helping money managers branch out from Canadian bank debt, which accounts for about 40 percent of the Canadian corporate bond index.

“They’re strong, well-rated ... companies that give us good diversification from our domestic market,” said fund manager Bill Girard at 1832 Asset Management LP, which bought into Apple, McDonald’s and PepsiCo Inc maple bonds.

Domestic investor demand for maple bonds also comes as Canadian banks shift some of their debt issuance to the United States and Europe.

Retaining the breadth of borrowers seen this year would boost maple market development, and sustained issuance could potentially get the bonds added to the FTSE TMX Universe Bond Index, the benchmark against which many bond funds in Canada are tracked.

“That’s a topic that we would like to revisit if that becomes something that investors are seeking,” said Marina Mets, director of FTSE TMX.

Mets said there is not currently a “mandate” for inclusion.

Much of the issuance by foreign companies - most of which this year have been U.S. multinationals - has been in industries that are not available in the Canadian debt market, and blue-chip companies have been able to borrow substantial amounts of money at attractive rates.

Apple, like many issuers this year, benefited from favorable pricing in the swaps market, which facilitates exchanging the proceeds into U.S. dollars.

At C$2.5 billion ($1.9 billion), Apple set a record for maple deals and the bonds have since performed well, adding to their appeal. Its spread over Canada’s equivalent government bond has narrowed to 75 basis points from 81.4 basis points at issue.

“There is a supply-demand dynamic that didn’t exist before that enabled Apple, enabled Disney to price significant size transactions at a premium to where they could otherwise raise funding in their home market,” said Scott Lampard, head of global markets at HSBC Bank Canada, which has been a lead manager on a number of maple deals this year.

($1 = 1.2895 Canadian dollars)

Reporting by Fergal Smith; Additional reporting by John Tilak; Editing by Leslie Adler

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