Bloomberg News

Infrastructure Risk Rises as Scandal Dents Sales: Canada Credit

November 15, 2012

Sales of Canadian project-finance bonds are lower this year as an ongoing investigation of alleged corruption in the Quebec construction industry makes the debt more expensive to issue.

The number of so-called public-private partnership deals fell this year to eight, from 14 last year, according to data from Jason Parker, head of Canadian fixed-income research at Bank of Montreal. (BMO) Relative yields for SNC-Lavalin Innisfree McGill Finance Inc.’s senior secured notes, have widened to 235 basis points from 218 basis points at the end of June, according to John Braive, vice chairman of CIBC Global Asset Management. Over the same period, the spread of peers in the Canadian Corporate Index narrowed to 141 basis points from 173, according to Merrill Lynch data.

An inquiry into corruption in the Quebec construction industry, which led to the resignation of Montreal Mayor Gerald Tremblay on Nov. 5, is souring sentiment among investors in private-public partnership bonds linked to projects for hospitals and universities in Canada’s second-largest province. Public-private deals transfer the obligation to design, build, finance and operate infrastructure in exchange for government payments.

Headline Risk

“Widening of public-private bonds may have a lot to do with the negative headline risk, and that would show up in spreads,” Robert Follis, head of corporate-bond research at Toronto-based Bank of Nova Scotia (BNS)’s Scotiabank unit, said in a phone interview.

Elsewhere in credit markets, Bombardier Inc. (BBD/B) was downgraded for the second time this week as the world’s third-largest commercial aircraft maker markets $1 billion of bonds to boost liquidity. S&P cut its assessment to BB amid declining cash flow and a delay to the maiden flight of the aircraft maker’s biggest plane, the CSeries jet. The decision followed that of Fitch Ratings on Nov. 12, to lower its grade on the Montreal-based company’s debt by a single step to BB.

Moody’s Investors Service on Nov. 7 reduced its outlook on Bombardier’s Ba2 rating to negative from stable, saying any additional shortfalls to cash-flow expectations would lead to a ratings downgrade.

The extra yield investors demand to own the debt of Canadian investment-grade corporations rather than the federal government held steady at 141 basis points, or 1.41 percentage points, according to a Bank of America Merrill Lynch index. Yields rose to 2.94 percent, from 2.91 percent on Nov. 13.

Bond Returns

In the provincial bond market, relative yields were 1 basis point wider at 79 basis points. Yields climbed to 2.49 percent, from 2.47 percent on Nov. 13, according to Bank of America Merrill Lynch data.

Canadian corporate bonds have returned 6.2 percent this year, compared with gains of 4.1 percent by the nation’s government bonds and 4.7 percent by provincials, according to Merrill Lynch data.

Canada auctioned C$3.3 billion ($3.3 billion) of two-year government notes, drawing an average yield of 1.106 percent. The 1 percent securities are due in February 2015. The bid-to-cover ratio, a gauge of demand that compares the amount bid versus the amount offered, was 2.83, compared with 2.64 at the September two-year sale and an average of 2.59 at the past five offerings.

S&P Rating

The McGill University Health Centre closed a 34-year partnership in 2012 with SNC-Lavalin and Innisfree Ltd. to finance, build, and maintain the school’s Glen Campus. They raised C$764 million in a sale of senior unsecured notes in 2010. Standard & Poor’s revised its outlook on the Innisfree bonds to negative from stable last week because the project faces possible delays and relies on SNC as a guarantor.

“We’ve received calls from investors asking ’where could this pan out and how would this affect my investment?’” Grant Headrick, a DBRS vice president, said in a phone interview from Toronto. “People are wondering about the impact of the project and our views on SNC Lavalin as a contractor.”

DBRS rates the notes A-low and stable. SNC has a sound financial profile, a very strong reputation and extensive experience with large projects, Headrick said.

“You’ll see that spreads on the McGill notes have widened since the scandal,” CIBC’s Braive said during an interview at the Bloomberg Toronto office. “It has a lot to do with what’s going on with the construction inquiry in Montreal, so that’s been a bit of concern.”

Slowing Sales

Braive said issuance in the public-private market has “really slowed” because hospital construction in Ontario has slowed and because of the Quebec corruption probe, although he’s hopeful construction of the Detroit-Windsor Bridge will spur sales.

Prime Minister Stephen Harper announced an investment of at least $550 million to build a bridge from Canada to the U.S. to speed shipments across the busiest commercial border crossing with our largest trading partner.

“We hope that we eventually get the Detroit Windsor Bridge going because that’s going to be a big infrastructure piece of action, very big,” Braive said.

Other deals in the pipeline include Ottawa Light Rail Transit, Evergreen Line Rapid Transit Project, and the John Hart Generating Station, according to BMO.

“Next year is looking good for infrastructure-backed bonds,” Follis at Scotiabank said. “At this point, we feel there could be a pretty healthy pipeline of issues, but we will have to wait and see which deals make it to the bond market.”

BMO’s Parker foresees nine deals in 2013.

Bonds issued to finance a research centre for the Centre Hospitalier de l’Universite de Montreal lagged peers last month, losing 1 percent compared with flat returns for Bank of America Merrill Lynch’s Canadian Corporate Index.

To contact the reporter on this story: Katia Dmitrieva in Toronto at

To contact the editor responsible for this story: Dave Liedtka at

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