TORONTO — Manulife Asset Management, the investment arm of Canada’s largest insurer, swapped most of its Alberta bonds for British Columbia debt amid concern the province’s coffers will be slow to recover from historic floods.
The $965 million Manulife bond fund reduced its allocation of debt from the nation’s foremost oil-producing region to 2.2 per cent from the 4.9 per cent it held June 10, while raising its exposure to British Columbia to 10 per cent from nine per cent.
“British Columbia is in much better shape than Alberta at this time,” Terry Carr, who helps oversee $16 billion as head of Canadian fixed-income at Manulife. “In the near-term, they are in a surplus situation, while Alberta is going to be in a deficit situation.”
Alberta’s government committed $1 billion to pay for relief from the worst flood in the province’s history as Premier Alison Redford said plans to balance the provincial budget next year would be delayed. Insured losses to the province from the June flooding may total $2.25 billion to $3.75 billion, according to Bank of Montreal.
Uncertainty over the negative financial impact on the province, including its top credit rating and ability to meet its budget goals, is keeping Manulife away, Carr said.
Alberta bonds returned 0.5 per cent through July 18 from June 21 when the province evacuated 75,000 people as water levels rose, while British Columbia bonds gained 0.9 per cent, according to Bank of America Merrill Lynch data. British Columbia 10-year bonds outperformed comparable Alberta debt by one to four basis points since June 10, Carr said.
Flooding in Calgary, where most of Canada’s oil companies are headquartered, and the province’s south will slow growth to 2 per cent from a previously forecast 2.5 per cent, Michael Gregory, senior economist in Toronto at BMO, said in a July 2 note to clients.
As Alberta and its insurers tally the costs of flooding damage, oil-sands companies are grappling with the challenges of bringing rising crude production to market amid delays in pipeline projects such as TransCanada Corp.’s $5.3 billion Keystone XL. Canadian energy companies have underperformed U.S. peers by 55 percentage points on Standard & Poor’s indexes during the past three years as Western Canada Select oil prices averaged $19.53 a barrel less than the U.S. benchmark, according to data compiled by Bloomberg.
Elsewhere in credit markets, the extra yield investors demand to own the debt of Canadian investment-grade corporations rather than the federal government widened last week to 124 basis points, or 1.24 percentage points, from 123 basis points on July 12, according to the Bank of America Merrill Lynch Canada Corporate Index. Yields fell to 3.09 per cent on July 19, from 3.15 per cent a week earlier.
Spreads on provincial bonds expanded to 72 basis points, from 71 the week before, according to Bank of America’s Canadian Provincial & Municipal Index. Yields fell to 2.88 per cent, from 2.93 per cent on July 12, Bank of America index data show.
Provincial securities have lost 1.9 per cent this year, while federal-government bonds have dropped 1.7 per cent, the data show. Corporate bonds have risen 0.3 per cent.
British Columbia has a “low debt-to-gross domestic product ratio, balanced budgets for the next few years, liquidity” and the bonds are “not too expensive from a relative yield spread comparison,” Manulife’s Carr said.
British Columbia has pledged to balance its budget after the Liberal Party defeated the New Democratic Party in the May 14 election. Premier Christy Clark said she intends to raise taxes on companies and high earners, control spending, and sell some government assets, according to budget documents.
British Columbia, with a population of 4.6 million, and Alberta, which sits on the world’s third-largest pool of crude reserves are the only two among 10 Canadian provinces with top ratings from Moody’s Investors Service and Standard & Poor’s.
Alberta said in its March 8 budget it planned to sell $7.34 billion of debt this fiscal year, an increase of 23 per cent over the previous fiscal year and the most borrowing since 1986 in nominal terms, according to data provided by the finance ministry, as the province heads for its sixth straight deficit. The province has $17.9 billion of bonds outstanding, according to Bloomberg data.
“It could present a buying opportunity in the future,” Carr said. “But we would be a little hesitant to get too far in front of that by overweighting it much more today. That’s until we get a better sense of how much borrowing they’ll have to do.”