Author Archive

What’s Going On With Oil?! “V” Or “U” Recovery?

As active investors in Western Canada we cannot help but pay close attention to energy prices. Over the last four months, oil prices have come off significantly and many investors are still grappling with the impact this will have on the Western Canadian economy.

Cheap oil would normally boost the US economy, but 30 year treasury yields are dropping too, which indicates the opposite.

Source: http://www.zerohedge.com/news/2015-01-06/recovery-sp-500-loses-2000-level

High Yield rates in the energy sector are exploding.


Source: http://www.zerohedge.com/news/2015-01-06/crude-crash-crushes-credit-risk-wti-hits-47-handle-energy-spreads-top-1000bps

This seems to indicate the exit by credit investors from the energy space into something less risky which makes sense and may explain the first chart.

Lastly, in Canada, our anecdotal experience is such that senior credit in the energy related economies is backing away from new deals, which correlates with the low Canadian heavy crude prices.

Source:  http://www.zerohedge.com/news/2015-01-06/canada-heavy-oil-drops-below-35-rig-count-hits-record-low-january
 

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Canadian High Yield Bond Rates

Bond Capital’s seasonal credit commentary:  As an alternative investor who structures, arranges and funds subordinated debt, mezzanine capital and equity investments, we are keenly interested in the rate of return on capital.  Here, Bond Capital will compare the high yield bond market and the mid-market Canadian Bank debt market.  Due to the limited information available on Canadian high yield bond rates, we will use US high yield bond rates as a proxy.  Our readers may recall that in the fall of 2012, we looked at the liquidity risk premium on mezzanine capital, while in the spring of 2013, we looked at small company risk premiums for high yield bonds, notes and corporate paper, and in the fall of 2013, we showed the substantial rise in the 5 and 10 year Canadian Bond yield trend.

Today, Bond Capital presents its research on high yield bond rates in comparison to the cost of mid-market Canadian Bank debt. In order to achieve the magnitude of leverage offered by the high yield bond market, Canadian senior bank debt is complemented with mezzanine capital for this comparison of finance options in the Canadian mid-market. US high yield bond rates were at 15 year lows in January 2014. Over the last 4 years, high yield rates range between 5.9% and 7.5% as shown in Chart 1 below. Bond Capital transactions are shown in Chart 2 wherein the cost of debt ranges between 4.2% and 6.9%. The Bond Capital transactions were between $100 and $250 million in enterprise value. The threshold for high yield bond issuance is estimated at greater than $200 million in enterprise value. The result illustrates that the Canadian mid-market bank debt markets are highly competitive with publicly traded high yield notes.



Further differences between high yield bonds and a made-in-Canada banking deal are summarized in the table below:

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