A boost from the commodities sector, refinancing requirements, and heightened mergers and acquisitions activity will prompt Canadian businesses in 2017 to turn to the high-yield debt market at an increased pace.
"After a significant slowdown in 2016, we expect speculative-grade debt issuance by Canadian companies to increase towards levels of about US$30 billion, up from US$22 billion through November 2016," said Ed Sustar, a Moody's Investors Service senior vice president.
So far this year, the Canadian speculative-grade bond sector saw only 16 new deals compared to 27 the year prior, with the majority of these transactions taking place in U.S. dollars, Sustar noted.
“Moody's attributed the decline to a dearth of new deals from the country's energy and mining sectors, both of which were hindered by the drop-off in commodity prices,” he said.
Still, domestic market bond issuance for the five speculative-grade Canadian companies reached CA$910 million year-to-date, up from the two deals the year prior that totaled CA$625 million Moody’s said. As about CA$5 billion of Canadian-dollar high-yield bonds issued in the last six years need to be refinanced, Moody’s expects speculative-grade issuance to increase over the next two years.
“The median EBITDA interest coverage for Canadian speculative-grade companies has tapered off to an historic low of 2.5x as of September 2016, while median debt/EBITDA has improved slightly, to 5.1x, from an historic high in 2015 of 5.2x,” Moody’s said.
Further, Moody’s expects the Canadian default rate to decline over the next year and come more in line with the long-term average of about five defaults per year, Sustar said. “In addition, the speculative-grade liquidity profile of Canadian companies will improve over the next 12 to 18 months with higher refinancing activity and stronger cash flow generation.”
– Nicholas Stern, editorial associate