Bloomberg News

Salmon Bonds Get the Hook as Junk Market Stalls: Canada Credit

February 15, 2013

Cooke Aquaculture Inc., North America’s largest Atlantic salmon farmer, pulled its $250 million bond sale, signaling Canadian borrowers have to pay more to tap the high-yield bond market as investors withdraw from the riskiest debt.

The Blacks Harbour, New Brunswick-based company, which farms salmon, trout, sea bass and sea bream, can borrow for less from banks than from the junk bond market, spokesman Chuck Brown said. Investors were demanding about a 9.75 percent yield on the eight-year bonds when the sale was called off last week, according to two people who were approached on the sale and asked not to be identified because the discussions were private. Brown said he couldn’t immediately comment on pricing.

U.S. demand for the riskiest debt pushed yields to historical lows this year and prompted Canadian companies to issue a record amount of high yield Yankee bonds in 2012. Signs are growing it will be more difficult for Canadian companies to issue south of the border as Canadian junk bonds are on track to post their worst returns in eight months and the world’s biggest debt investors retreat from the market.

“That’s left market participants in a position where they don’t need to scramble and buy every frigging deal that comes,” Paul Tepsich, who manages C$203 million as chief executive officer at High Rock Capital Management Inc., said by phone from Toronto. “They can be more discriminating on the deals that are shown to them and like this fish deal, you know what, guys just stood back.”

Corporate Returns

Elsewhere in credit markets, the extra yield investors demand to own the debt of investment-grade corporations over government benchmarks was unchanged at 127 basis points from the day before, according to Bank of American Merrill Lynch data. The yield fell to 3 percent from 3.02 percent the day before, the data show.

The premium investors demanded for provincial debt over federal benchmarks was unchanged at 73 basis points, the Merrill data show. Yields fell to 2.68 percent from 2.7 the day before.

Canada’s corporate bonds have lost 0.1 percent this year compared with declines of 1.3 percent for provincial bonds and 1 percent by Canadian government debt, according to the Merrill Lynch indexes.

The two biggest exchange-traded funds for speculative-grade notes, with $27.9 billion in assets, reported about $1.05 billion of withdrawals in the week ended Feb. 5, including the biggest daily outflow from State Street Corp.’s fund since May, Bloomberg data show.

Fund Outflows

Canadian high yield debt issued in U.S. dollars is returning 0.1 percent this month, its worst performance since May. KKR Financial Holdings LLC, the credit unit of the private- equity firm run by Henry Kravis and George Roberts, said last week it cut a portfolio of high-yield debt by 39 percent in the second half of last year.

The outflows by major U.S. investors came as issuance picked up. Issuance of debt with ratings in the lowest speculative-grade categories of B3 and below surged to a record $13 billion a month in the last six months, Moody’s Analytics said in a report published Feb. 4. Last year, Canadian companies issued $14.9 billion of debt in the U.S., the most ever in data compiled by Bloomberg.

“If outflows start really picking up then for sure, it’s going to be harder for anyone to bring deals, whether you’re a Canadian issuer or a U.S. issuer,” said Tepsich.

The Cooke notes were being sold by Credit Suisse Group AG and had been rated Caa1 by Moody’s Investors Service and CCC+ by Standard & Poor’s, seven steps below investment grade. Cooke pulled its deal on Feb. 8, Brown said in an e-mail.

Record Yields

Cooke’s debt of eight times its cash flow is the third- highest among North American food-packaging firms, behind Diamond Foods Inc. and Chiquita Brands International Inc., according to data compiled by Bloomberg.

Yields on Canadian junk bonds issued in U.S. dollars reached 5.8 percent Jan. 24, the lowest on record, according to Bank of America Merrill Lynch data. The premium investors demand to own the securities over government debt has climbed 25 basis points since Jan. 28, when it was the lowest since 2007.

“My concern about high yield is global, it’s not necessarily specific names, it’s the tremendous inflows witnessed in that market over the last two years,” said Michel Pelletier, who helps manage C$32.5 billion of assets as senior vice-president of fixed income at Standard Life Investments Inc. by phone from Montreal. “My concern is people start to move out and then bond managers will have to sell.”

More Protection

Cooke increasedinvestor protections on its offering, altering covenants to reduce the amount of secured debt that can be incurred, toughened a liens test and restricted the calculation of earnings before interest, tax, depreciation and amortization, a person familiar with the transaction said in a telephone interview on Feb. 6.

Farmed salmon risk catching infectious salmon anemia. While the virus doesn’t pose a risk to human health, an outbreak can force producers to cull their fish. Detection of the disease by Cooke in Canada’s Maritime province of Nova Scotia last February caused the company to cull two cages of salmon, according to a statement on its website.

“The high yield market is more discriminating in the types of deals it will invest in than was the case a few weeks ago. The market is a bit more cautious,” Sabur Moini, a portfolio manager who oversees about $2.5 billion of high-yield assets at Payden & Rygel in Los Angeles, said in an e-mail.

To contact the reporters on this story: Ari Altstedter in Toronto at aaltstedter@bloomberg.net; Rebecca Penty in Calgary at rpenty@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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