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: