This year is shaping up to be another solid year for debt issuance, aided by a recent drop in bond yields. However, it could be a spectacular one, if only the banks would resume borrowing at a torrid pace.
Since January, roughly $44-billion of new debt has been sold in Canada, according to Desjardins Securities, down 15 per cent from a stellar 2013 when debt issuance smashed records. Dig through the aggregate numbers, and you'll see the drop stems from weak financial debt issuance.
Year-to-date, financials – largely the banks – have issued $25-billion worth of new debt, down roughly one-third from the same period a year prior. Non-financials, meanwhile, have sold $19-billion worth of new debt, up just over 30 per cent from this point in 2013.
What's driving the shift? That's the tricky part. No one seems to really know the definitive answer, but there are a bunch of theories in play.
For starters, the banks issued a boatload of debt in 2013 – $54-billion of it, according to RBC Dominion Securities. Record runs can't last forever.
The banks have also been heavy borrowers beyond Canada's borders this year, with roughly $86-billion borrowed abroad, according to Desjardins. At this point in 2013, the Big Six banks had only raised about $36-billion outside their home market.
Regulatory issues also loom large. Though the banks sold billions of dollars worth of preferred shares in 2008 and 2009, according to the latest rules, the shares will no longer count towards their capital requirements. Lately they have been busy buying back these offerings and then re-issuing new preferred shares that can be converted into common shares should a severe financial crisis ever break out.
The banks are also getting ready to issue a type of subordinated debt. In March Royal Bank of Canada chief financial officer Janice Fukakusa said she and her counterparts at rival lenders are working with regulators to determine what triggers should be used to determine when these issues are converted to common shares, and how the resulting shareholder dilution should be managed.
There's also a very simple theory, one that can't be overlooked: the banks' balance sheets aren't expanding at such a rapid pace anymore, which means they don't need to fund the purchasing of new assets as aggressively as they once had.
Because each of these theories is equally plausible, there is a lot of head scratching on Bay Street bond desks. But there should be some relief come the fall, when maturing bonds should lead to more financial debt issues.
Tim Kiladze