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Hospital Bonds Pace Top Corporate Gainers in 2012: Canada Credit

January 02, 2013

Canadian corporate bonds topped government debt last year by the most since 2009, led by gains in public-private partnership securities issued to finance the construction of hospitals.

Health-care bonds returned 10.5 percent in 2012, the top performing Canadian corporate category, compared with returns on the broad corporate index of 6.5 percent, 2.4 percent for federal bonds and 3.1 percent for provincial bonds, according to Bank of America Merrill Lynch data. The firm’s Global Corporate Index made 11 percent.

Public-private bonds yield more than sovereign debt with lower risk than other types of corporate bonds because government backing of the projects lowers the probability of default. Once an obscure corner of credit markets, the debt will remain in high demand this year even as issuance rises, Jean- Francois Godin, vice president of fixed income in Montreal at Desjardins Securities, said in a Dec. 28 interview.

“As a group, demand has been extremely good this year,” Godin said, referring to 2012. “It will be stronger next year because there’s a large pipeline of infrastructure projects that have been announced.”

The bonds of Health Montreal Collective LP, the group financing the Montreal University Health Centre, returned 18.5 percent last year, Merrill data show. The 6.72 percent debt maturing in September 2049 is rated Baa2 by Moody’s Investors Service and has a face value of C$1.37 billion ($1.39 billion).

Roads, Hospitals

SNC-Lavalin Innisfree McGill Finance Inc.’s 6.63 percent bonds due in June 2044, with C$764 million outstanding, returned 7.7 percent last year, the data show. The debt is rated A- by Standard & Poor’s.

Elsewhere in credit markets, the extra yield investors demand to own the debt of Canadian investment-grade corporations rather than the federal government ended the year at 135 basis points, or 1.35 percentage point, in from 183 at the end of 2011, a tightening of 48 basis points, according to the Merrill data. The debt yielded 3.04 percent, compared with 3.40 percent the year before.

In the provincial bond market, spreads were 75 basis points and yields 2.53 percent on Dec. 31, compared with 70 basis points and 2.50 percent a year earlier.

Public-private partnerships or “P3s”, are increasingly being used to fund infrastructure projects in Canada with private companies taking on the obligation to design, build, and finance projects such as building roads and hospitals in return for government payments.

Issuance Projection

All federal infrastructure projects creating an asset with a life span of at least 20 years and capital costs of C$100 million or more, are screened to determine whether it is suitable for a P3, according to PPP Canada, a federal government website.

Public-private debt issuance declined last year and the limited supply drove returns higher. New issues of public- private bonds totaled C$3.96 billion in eight deals, down from C$6.80 billion in 14 deals in 2011, according to Jason Parker, head of Canadian fixed-income research at the Bank of Montreal (BMO) in Toronto. Nine new issues scheduled for 2013 will reach C$5.72 billion.

“You’ve got all these people who like the asset class now, they’ve had good performance with it, and these are highly rated entities,” Greg Woynarski, managing director at Scotia Capital’s debt capital markets business in Toronto, said in a Dec. 31 interview. “You’ve got all this pent up demand for these kinds of deals.’

Aging Population

Health-care bonds have been especially popular because they are underpinned by the need of governments to serve an aging public, Godin at Desjardins said.

‘‘It’s a problem across North America, but it’s more acute in Canada - you’re facing an aging population, where most of the health-care centers and hospitals were built something like 35, 40 years ago,” he said. “They have to build new assets to meet demand -- that’s why we don’t believe the trend is going to stop any time soon.”

The percentage of Canada’s population aged 65 and over has been increasing steadily for decades, reaching 14.8% in the 2011 Census, it’s highest level on record.

Before 2010, public-private bonds were mainly bought by insurance companies in private placements, said Scotia Capital’s Woynarski. That year, McGill University Health Centre sold bonds to the public after a series of road shows that promoted the asset class.

“McGill was really the watershed event, because the size of that deal,” said Woynarski, whose firm was the lead manager of the sale. “It was too big for the five insurance companies in Canada to buy it.”

The McGill project attracted attention last year because of a scandal in the construction industry that lead to the resignation of Montreal’s mayor. Because of that, the McGill bonds were one of the few public-private bonds that were actively traded this year, Desjardins’ Godin said. Most do not trade in the secondary market because investors tend to buy and hold them, he said.

To contact the reporter on this story: Edward Welsch in Calgary at

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

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