Income trusts now account for about 12% of the domestic capital market, according to a new commentary from Standard & Poor’s Ratings Services.
“Market capitalization and the number of income funds listed on the Canadian Income Fund market continue to grow and account for about 12% of total market capitalization,” said Standard & Poor’s credit analyst Damian Di Perna, in the commentary.
As of June 30, there were 214 listed operating income funds (net of the fund of funds) with a total market capitalization of more than $140 billion.
S&P notes that he Canadian income trust market originated in the 1980s with traditional oil and gas royalty trusts; however, today’s market has broadened to real estate, power generation, pipeline, and various other business sectors.
The business trust sector is the fastest growing segment of the income fund market and encompasses a broad mix of businesses ranging from canned sardines producers to telecommunication providers, and also ranges from small to large capitalized funds, S&P says.
Investors generally purchase income funds for their regular cash distributions and attractive yield; however, distributions are only as secure as the underlying businesses, it notes.
As the income fund market increases in size and complexity, SSUP says it is beginning to see some trends such as the emergence of funds with higher business risk, risky acquisition strategies, higher leverage, and aggressive payout policies. “This all adds to the market’s complexity and exposes a fund’s target distributions to potential cuts and suspensions,” it warns.