Domtar sells U.S. dollar deal; domestic calendar quiet; Canadian covered bond market stalls

By Cristal Cody

Prospect News, Aug. 20 - Canadian issuer Domtar Corp. sold a U.S. dollar-denominated $250 million of long bonds on Monday, while the domestic primary market stayed quiet and bonds came in slightly in secondary trading, according to informed sources.

"This week has the look of being very quiet," a syndicate source said.

August is typically a slow primary month in Canada.

"I am hearing September is looking to be much busier," the syndicate source said. "We usually see utility issuance on the back of late summer and early fall, but we haven't seen many of the utilities come to market yet, so we're still watching that segment."

Utility bonds have "underperformed a little bit recently only because our market gets spooked about macroeconomic things and investors tend to roll into utilities and when they feel more comfortable roll out of utilities into a higher volatility product," a bond source said. "Regulated utilities traditionally trade expensively; so, we've seen a little bit of relative value buying recently."

In the secondary market on Monday, Hydro One Inc.'s bonds were mostly flat with the long bonds slightly cheaper, a market source said.

The Toronto-based electric utility's 5.36% bonds due 2036 fell about a nickel to 121.25 on Monday, the source said.

The secondary market was fairly quiet on Monday with bonds trading slightly better, sources said.

The Markit CDX Series 18 North American investment-grade index firmed 2 basis points to a spread of 98 bps.

The Markit CDX Series 18 North American high-yield index rose to 98.60 from 98.34.

Canadian government bonds closed flat to better. The 10-year note yield fell 1 bp to 1.94%. The 30-year bond yield closed unchanged at 2.48%.

Domtar sells 30-year bonds

Domtar was in the market Monday with a $250 million offering of 6.25% 30-year senior notes priced at 337.5 bps over Treasuries, a market source said.

The notes (Baa3/BBB-/) were sold at 99.581 to yield 6.281%. There is a make-whole call at Treasuries plus 50 bps, and the offering features a change-of-control put at 101%.

Bookrunners were J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC and RBC Capital Markets LLC.

Proceeds will be used for general corporate purposes, including capital expenditures and strategic acquisitions.

The notes are guaranteed by U.S.-based wholly owned subsidiaries of Domtar that guarantee debt under the company's credit agreement.

The fiber-based product maker is based in Montreal.

Covered bond market quiet

Primary issuance in Canada's covered bond market has stayed quiet over the summer and is expected to remain flat until Canadian legislation is finalized, DBRS said in a report on Monday.

The Canadian federal government introduced the draft covered bonds legislation on April 26. Under the legislation, banks will be prohibited from using insured mortgages to back domestic covered bonds.

"The Canadian covered bond market has been quiet since June, with no new issuance," the credit rating agency said in the report. "DBRS does not expect any new issuance until legislation is finalized."

Canadian banks brought C$21.7 billion in 12 U.S. dollar-denominated covered bond deals in 2011. As of July 31, Canadian issuers have sold nine U.S. dollar deals that total C$49.9 billion, or 78.6% of covered bonds outstanding. The total amount outstanding in the covered bond market was C$63.4 billion as of July 31, DBRS said.

Canadian issuers with outstanding covered bonds include the Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Toronto-Dominion Bank, Royal Bank of Canada, Bank of Montreal, National Bank of Canada and Caisse centrale Desjardins due Quebec.

Andrea Heisinger contributed to this review

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