The Canadian debt market has traditionally been dominated by investment grade issuers, but the speculative side of the market is growing, notes a new report from Moody’s Investors Service.

The rating agency reports that there has been a significant increase in the number of speculative-grade issuers raising capital in the Canadian market. Over the past year, more than $1.7 billion has been raised by speculative-grade companies in the domestic market, it notes.

Moody’s expects high-yield bond issuance may increase, particularly as income trusts lose their favourable tax status at the end of this year.

“We believe Canadian investors may increasingly look to speculative-grade debt as a yield product replacement for income trust units,” it says. Additionally, it suggests that income trusts may increase leverage and debt issuance once they’ve converted to a traditional corporate structure.

Also, Moody’s estimates that over the next five years, approximately $30 billion of speculative-grade debt from nonfinancial Canadian-based corporations will mature.

While the domestic market for speculative issuance is growing, the report points out that it remains small when compared to the amount of capital raised by Canadian speculative-grade companies in the United States. It notes that approximately one third of the US$30 billion raised by Canadian-based companies in the U.S. in 2009 was raised by speculative-grade issuers.

The report also explains how Moody’s rates and analyzes non-financial speculative-grade companies and seeks to better inform Canadian investors about the credit risks of speculative-grade debt. Moody’s expects the Canadian one-year speculative-grade default rate to fall over the next 12 months from its current level of 8.3% to finish this year at 4.8%, a level close to its historical average (since 1989) of 4.7%.

IE