Monday, January 29, 2007

Top 5 Canadian Debt Underwriters

Globe and Mail, Boyd Erman, 29 January 2007

In a development that will shock nobody who follows the bond market, RBC Capital Markets won the race to underwrite the most debt sales in Canada.

And as usual, it wasn't exactly a photo finish. According to figures by Bloomberg News, the firm led 385 deals in the Canadian market in 2006, earning credit for raising $36.08-billion for companies and governments. Scotia Capital Inc. edged out TD Securities Inc. for second place, while CIBC World Markets Inc. and BMO Nesbitt Burns Inc. rounded out the top five. None of the other firms topped $30-billion in credit.

It was a busy year for the overall Canadian bond market, with sales totalling $175-billion, up from $122.5-billion in 2005.

A big year for the Canada Mortgage Bond program, which raises money to fund home loans, spurred activity in the government category.

Corporate issuance was also on the rise as competitive rates kept the country's companies borrowing in their home market and drew international borrowers here to take part in the new Maple bond market. Foreign companies that tapped the growing Maple market included Citigroup Inc., Goldman Sachs Group Inc. and Bank of America.

"These issuers would never have thought of selling bonds in Canada until recently and it's really changed the nature of the Canadian market from a local market to a global market," said Larry Bates, head of debt capital markets in Canada for RBC. His firm topped all three main segments of the market: raising money for governments, Canadian companies and foreign companies via Maple bonds.

Given the surge in borrowing in Canada last year, it will be tough to top 2006's total in 2007, Mr. Bates predicted.

"Last year we saw such a tremendous increase in borrowing activity in Canadian dollars, I can't imagine us having that kind of increase again next year," he said.

Bond deals generally slide under the radar, overshadowed by the flashier equity market, but one transaction last year that caught the eye of many who follow the world of debt was Barrick Gold Corp.'s innovative copper-linked note sale.

Toronto-based Barrick has always been a financial innovator. The mining company was a pioneer in using hedging to lock in gold prices to even out its earnings back when bullion had little shine in the eye of investors.

But when gold prices started to soar, Barrick's hedging quickly turned the company from darling to goat as the hedges, which locked in prices at lower levels, kept the miner from benefiting fully from the climbing value of bullion. So Barrick disavowed the practice, to the cheers of shareholders.

That left the company in a conundrum last year. After buying Placer Dome Inc. to become the world's biggest gold miner, Barrick suddenly found itself with copper production that didn't fit in with its strategic goal, but that could be used to raise money to build gold mines. The price of copper was soaring, making it tempting to hedge some of that copper to lock in prices -- except for the aforementioned distrust of anything related to hedging by mining investors. So Barrick chief financial officer Jamie Sokalsky started looking at ways to lock in copper prices without a straight-ahead hedge.

In concert with investment bankers at UBS and Morgan Stanley, Barrick hit on the solution -- bonds with interest payments funded by some of Barrick's copper production. Barrick would get $1-billion (U.S.) up front with sales of copper at locked-in prices bringing in the money to pay the first three years of interest.

Investors snapped up the issue and the demand has other mining companies calling the folks at Barrick, UBS and Morgan Stanley who thought up the structure to inquire about copycat financings.

"We were quite pleasantly surprised with what a positive reaction we got to it," Mr. Sokalsky said. "It did have a pretty high profile as opposed to just going out and hedging copper. People thought it was kind of innovative and nifty."

• Top five Canadian debt underwriters (Includes Government, Corporate and Maple Bonds):
Rank                      Amount        Number
($ million) of deals
1 RBC Capital Markets $36,081.30 385
2 Scotia Capital 23,961.90 245
3 TD Securities 23,380.50 261
4 CIBC 22,847.80 334
5 BMO Capital Markets 19,285.70 235

Source: Bloomberg Financial Services