Tuesday, October 18, 2011

Loan officers say: Canada is doing Ok

Interesting times in Canada!  Late last week the Bank of Canada issued its Senior Loan Officers Survey, a quarterly affaire that tracks where the lending market is going.  Of course in Canada with 6 large lending institutions the information is unusually helpful – it is a real source of help in understanding what lenders “believe” the market to be doing.  First off, the demand for loans remains strong, and condition continue to be favourable, competition is the problem, there’s too much of it keeping standards loose (the same for pricing), although the improvement has “diminished... not too sure what to make of that “negative” statement.  The BoC seems to be of the opinion that lending standards remain reasonable and seem to have nicely rebounded from the lows of 2009.    

The Canadian bond market is saying a similar story with a strong probability that 2010 record $78 billion in new issuance will be “beat”.  As of last week the Canadian market has seem issues totalling C$61 billion vs. $55 billion in 2010.  The IPO market while not “on-fire” is far from being a disaster, despite the market being down nearly 12% since January 1, 2011. 

The question is “What about 2012”, there the news is far from clear.  There is no doubt that Canadian corporations have been cleaning up their balance sheet (over the past 18 months) issuing longer term debt to increase their duration (and reduce cash flow exposure).  Also, it has to be pointed out that for the past year financing costs for corporations have been very attractive.  There is a “feeling in the air” right now.  That every thing could come down crashing.  The American economy is weak, Europe is playing with fire and the non-OECD countries because of their inflation problem cannot be counted on to take up the slack.

All these represent a substantial problem for Canada – as a small export nation when the bulk of our clients are in trouble, we too are in trouble.  Not only is an issue as to sales, price is also an issue.  Although non-OECD countries now account for about 50% of oil consumption (and about 55% of all energy consumed) it remains that this is only one aspect of the overall export situation:  what about Zinc, gold etc.

I wish I had a solid conclusion – bottom line the Canadian debt market is doing fine this year.  Market fears are interesting, but investors are still aggressively buying Canadian corporate bonds... BTW the buyers are mostly Canadian, as the issuers are generally not well know outside the country.  Foreign investors focus on sovereign instruments. 


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