Economic recovery, increased business spending and investment, and a hotter merger and acquisition market should all boost Canadian corporate bond issuance in the next six- to 12-months, says a report Thursday from Standard & Poor’s Ratings Services.

“The sustained recovery in the North American economy and a building global economic recovery are producing an increase in business spending,” said Standard & Poor’s economist and fixed income analyst Robert Palombi. Canadian companies are buying new equipment as they strive to improve their cost competitiveness, S&P noted.

Also, M&A activity is picking up and there has also been an increase in direct investment abroad by Canadian companies. “This mix of investment activity should produce increased bond issuance both domestically and in the cross-border market,” it said.

Bond issuance should also get a boost from refinancing requirements in the next year or so, “as the bulge in bond issuance in the previous business cycle reaches maturity and needs to be refinanced”.

“Finally, the cost of capital is not expected to significantly increase for corporate borrowers despite the upward pressure on interest rates that might result from a rise in new bond supply. Although a less
accommodative monetary policy stance by North American central banks is on the horizon, benign inflation fundamentals will work against a dramatic rise in short- and long-term interest rates,” it says.

Investor demand should also be supported by benign inflation fundamentals and improving credit quality, S&P says. “ These favorable demand conditions will help to curtail the widening in credit spreads expected to result from the increase in new bond supply and will also help to mitigate upward pressures on the cost of capital for corporate borrowers.”