The combination of Canadian natural resource companies and the U.S. high yield market seems as natural as a hand and a glove.
The latest example played out Tuesday when Vancouver-based First Quantum Minerals launched a US$1.5-billion offering of senior notes, with one tranche for six years and the other for eight years. Much of the proceeds of the offering by the B-rated issuer will be used for balance sheet adjustments, including repaying certain term and revolving credit debt. A couple of weeks back, Calgary-based Gran Tierra Energy Inc. closed a US$300-million offering of seven-year 6.25-per-cent senior notes.
So why the rush south?
For starters, the U.S. high yield market is the biggest and most liquid in the world. It has been financing issuers, both domestic and foreign for more than three decades and has become very good at pricing such securities. (Credit the legendary financier, Michael Milken, for getting the market started.) In contrast, the Canadian high yield market is small and could not handle the volume. Besides, investors have enough equity exposure to the resource sector.
As well, Canadian issuers have special access because of the workings of MJDS — the multi-jurisdictional disclosure system — which essentially allows Canadian companies to raise capital in the U.S. using Canadian documentation. In effect, the U.S. market is an extension of the Canadian market.
Another reason is that many of the issuers have U.S. dollar revenue, which allows them to build a U.S. dollar nest egg to fund the interest and principal repayments. In many cases though, the issuers repay the principal with another U.S. dollar-denominated offering.
Brad Meiers, head of debt capital markets at HSBC Canada, said Canadian resource issuers are attracted to the U.S. because of “the size” that can be raised and because a U.S. dollar funding is a “natural hedge,” given that resources are priced in U.S. bucks. “Most are B-rated and the Canadian high yield market is not single B,” he said.
First Quantum’s current offering is the second it has made in the past year. Last March, it launched a two-part US$1.6-billion high yield offering. Due to strong demand, the issue — which had terms of six and eight years — ended up at US$2.2 billion.
As with its 2018 offering, the issue was both a chance to extend term and to orient its balance sheet: it would use the proceeds to refinance two offerings of senior notes and to repay other debt. We were unable to reach First Quantum.
Over the past 14 months, the U.S. market has welcomed Athabasca Oil (which raised US$450 million); Baffinland Iron Mines (US$350 million); Cenovus Energy, (with a split rating, one part of which is non-investment grade, raised US$2.9 billion); IAMGold Corp. (US$400 million); Mountain Province Diamonds (US$330 million); New Gold (US$330 million); Precision Drilling (US$400 million); Seven Generations Energy (US$700 million); Taseko Mines (US$250 million); and Yamana Gold (US$300 million).
But non-resource non-investment grade companies also flock to the U.S. high yield market: over the past year, Bombardier (US$1 billion); Clearwater Seafoods (US$250 million); Trinidad Drilling (US$ 350 million); Valeant Pharmaceuticals (US$5.25 billion) and Stoneway Capital Corp. (US$665 million) have raised debt capital in the U.S. And to show how open is the U.S. market, Stoneway is privately held with interests in Argentina.
But Canada still does get its share of foreign issuers, which want to raise capital in the local market. Morgan Stanley was the most recent issuer in the Maple market: picking up $100 million in the same market. Heathrow Funding has hired bankers to lead a forthcoming transaction.