Olympic Risk Ignored by British Columbia Buyers: Canada Credit
By Greg Quinn, Chris Fournier and Christopher Donville
Feb. 10 (Bloomberg) -- British Columbia bonds may outperform the rest of Canada’s provincial debt market as its economy avoids a post-Olympics slump amid an increase in energy and mining investments.
The province’s 30-year debt yields 4.68 percent, about 67 basis points greater than a similar-maturity Government of Canada bonds. Ontario bonds yield 72 basis points more than federal debt. British Columbia and neighboring Alberta are the only provinces that carry Standard & Poor’s highest AAA credit ratings.
Commodity-rich provinces such as British Columbia and Alberta will eliminate deficits twice as fast as the more manufacturing dependant regions of Ontario and Quebec, said Warren Lovely, an executive director at CIBC World Markets who tracks government finances. The province’s budget deficit for the fiscal year ending March 31 grew to a record C$2.8 billion after Olympic-linked spending and the global recession.
“The Olympics is a positive for British Columbia but it’s not the only factor that contributes to outperformance in 2010,” said Lovely, who is based in Toronto. “Demand for commodities from Asia and other emerging economies, that’s going to contribute to Canada’s commodity-producing provinces.”
Premier Gordon Campbell wants to avoid the mistakes of Quebec and Montreal, where cost overruns and stadium construction delays forced the city to take on additional debt for the 1976 Summer Olympics. It took Montreal 20 years to pay off the C$1.5 billion debt, prompting locals to refer to the Olympic stadium as the “big owe.”
British Columbia will release its budget on March 2, two days after the Winter Games end.
Beats Ontario
Alberta forecast yesterday that its deficit will widen 31 percent next year to C$4.75 billion as government spending rises and revenue remains little changed.
British Columbia’s 4.7 percent bond due in June 2037 has returned 7.7 percent over the past 12 months, compared with gains of 7 percent for a similar Ontario bond and 0.9 percent for federal government debt.
“British Columbia will continue to be an attractive investment opportunity,” said Marc Rouleau, who helps manage C$18 billion ($16.8 billion), including British Columbia bonds, at Standard Life Portfolio Management in Montreal. “The Olympics, although typically a risk to the host’s finances, are likely a small part of a continuing positive story.”
Provincial Debt
Yields on provincial bonds held steady relative to benchmark rates.
The extra yield investors demand to own provincial bonds instead of Canadian government securities was 45 basis points yesterday, unchanged from the day before, according to the Bank of America Merrill Lynch Canadian Provincial Index.
The so-called spread has widened from the low this year of 39 basis points, or 0.39 percentage point, on Jan. 15 amid concern deteriorating government finances will slow the global recovery and make it harder for borrowers to meet debt payments. The spread touched 104 basis points on March 6, the highest since at least January 1997.
Canada’s provincial bonds have returned 1.5 percent this year, after gaining 3.7 percent in 2009, according to the index, which tracks 393 issues with a par value of C$435.3 billion. The nation’s federal bonds have gained 1.55 percent, after losing 1.5 percent last year. That compares with 2.29 percent and 15.34 percent, respectively, for Canadian corporate bonds.
Calgary-based Encana Corp. and Nexen Inc. are among firms that will likely boost spending on natural-gas exploration and production in British Columbia this year, said Martin Molyneaux, an energy industry analyst at FirstEnergy Capital Corp in Calgary.
Lumber Rebound
Vancouver-based West Fraser Timber Co. and Canfor Corp., which have been closing lumber mills after the U.S. housing market slump, will get relief as the worst of the plunge in lumber prices may be over, said Michael Richmond, an analyst at Salman Partners Inc. in Vancouver. Lumber prices have jumped 68 percent in the past five months on the Chicago Mercantile Exchange, touching $295.80 per 1,000 board feet on Feb. 5, the highest level July 2007. Lumber futures for May delivery fell 1.6 percent to $284.30 yesterday.
“We’re in a recovery phase in lumber and U.S. demand, but the recovery will be slow,” Richmond said.
Little Olympic Risk
Olympics-related spending will help British Columbia lead all provinces in growth this year, at 3.3 percent, according to Bank of Nova Scotia economist Alex Koustas.
The provincial government said it contributed C$765 million to the games. The province helped finance the C$2.05 billion transit line built by SNC-Lavalin Inc. between Vancouver’s airport and downtown; the C$883 million addition to a convention complex in Vancouver, and more than C$600 million in upgrades to the Sea-to-Sky highway linking Vancouver and competition venues near Whistler.
“Maybe there are some bills to pay after the fact but fiscally-poor positioning doesn’t seem to be scaring investors away,” said Chris Case, who manages C$5 billion in fixed-income assets including British Columbia bonds at Aviva Investors Canada Inc. in Toronto.
Case said he has little incentive to buy the debt because the yields are similar to other governments such as Ontario, the country’s largest provincial economy.
British Columbia should be able to balance its budget again by 2013, according to estimates from RBC Capital Markets. By contrast, Ontario will run deficits until at least 2015, the Toronto-based bank said.
‘Begin to Recover’
“When we compare it to Ontario or Quebec, I think B.C. has come out fairly well,” said Tom Nakamura, a fixed-income portfolio manager for AGF Investments Inc. in Toronto, who helps oversee about C$6 billion. “We are fairly comfortable with B.C.,” he said, adding the Olympics don’t create a “significant risk.”
British Columbia’s long bonds outperformed Ontario’s last year. The province’s 4.7 percent security maturing in June 2037 returned 3.8 percent versus the 3.5 percent for the equivalent Ontario bond. The 5 percent federal bond maturing in 30 years lost investors 6 percent.
S&P anticipates British Columbia will retain the top credit rating if the spending gap is closed over the next few years.
“The stable outlook reflects our expectations that B.C.’s economic and fiscal downturn will prove to be cyclical and that the economy will begin to recover in 2010,” Stephen Ogilvie, a credit analyst with S&P in Toronto, wrote in a Dec. 16 report.
To contact the reporters on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net; Chris Fournier in Montreal at cfournier3@bloomberg.net; Christopher Donville in Vancouver cjdonville@bloomberg.net.
Last Updated: February 10, 2010 00:01 EST |
