Relief Seen for Natural Gas Bottlenecks: Canada Bond Update

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(Bloomberg) — Canada’s battered market could be looking at some relief as TC Energy Corp. expands pipeline capacity and stockpiles remain low in Alberta at the start of heating season, according to Craig Nieboer, chief financial officer of producer Pipestone Energy Corp.

Benchmark prices at the AECO hub, which plunged close to zero in June, have already rebounded to $1.77 per million British thermal unit. Nieboer expects prices to strengthen in coming months.

Meanwhile, gas explorer Paramount Resources Ltd. and service provider CES Energy Solutions Corp. are looking at acquisitions if the price is right, according to CFOs Bernard Lee and Tony Aulicino. For CES, any deal would have to meet its goal to keep generating healthy cash flow, Aulicino said.

For all of Canada’s pipeline woes, Aulicino is optimistic about the finances of oil-sands companies.

The major players in Canada’s oil sands are “some of the best capitalized,” he said. “There are a lot of reasons to like that business.”

Ontario’s Phillips Open to Diversifying Debt: Canada Bond Update (14:40)

Ontario is open to diversifying its borrowing base, though most of its 30% foreign allocation will remain in U.S. dollars, Finance Minister Rod Phillips said.

The world’s biggest sub-sovereign borrower has issued about C$20.4 billion of its targeted C$36 billion ($27.3 billion) borrowing program for 2019-20. The majority of that has been Canadian debt, followed by the U.S. and a small slice of Australian bonds.

Phillips said Canada’s most populous province is committed to its pledge of balancing the budget by 2023-24 and to getting a handle on debt to create attractive conditions for investors.“We’re really focused on a very prudent plan,” so are keeping to that time horizon, Phillips said at Bloomberg’s Canadian Fixed Income conference in New York Wednesday.

National Bank CEO Open to Wealth Takeovers (1:25 p.m.)

National Bank of Canada’s Chief Executive Officer Louis Vachon says he’s not a fan of acquisitions, yet he’d still consider a deal to expand the Montreal-based lender’s wealth management division domestically.

“Essentially all of our acquisitions in the last 12 years in Canada have been in the wealth management space,” Vachon said Wednesday at the Bloomberg Canada Fixed Income Conference in New York. “So on the wealth management space we continue to be interested — but they have to make sense from a financial standpoint and from a cultural standpoint.”

Vachon reiterated that he isn’t looking to do further international acquisitions, after doing C$625 million ($475 million) of investments in African and Asian lenders in the past five years, including a takeover of Cambodia’s Advanced Bank of Asia Ltd. National Bank is focusing on expanding the Cambodian lender as well as its U.S. specialty finance division, Credigy, while looking to sell its African investments, Vachon said.

Despite his deal-making during his 12-year tenure, Vachon said he’s “very skeptical” of acquisitions and prefers building from within.

“I don’t like acquisitions: I feel they’re risky, they really take a lot of time and attention, sometimes out of proportion to the financial impact they can potentially have,” Vachon said. “Our team knows that when they bring an acquisition thing to me it has to be a pretty damn good thing, because my first thing I’ll say is, ‘No, don’t bother me.’”

“I want my team to focus on organic growth, and capital management,” Vachon said.

WeWork Co-Working Model Here to Stay (12:18 p.m.)

Co-working is here to stay despite the troubles faced by WeWork, which popularized the movement, Oxford Properties Group’s chief financial officer said.

“The success of the organization just highlighted a need and a customer base that probably wasn’t being served as well as it could have been,” Allison Wolfe said at Bloomberg’s Canadian Fixed Income Conference on Wednesday.

Still co-working is unlikely to take a major share of the Canadian market, according to Cecilia Williams (NYSE:), chief financial officer at Allied Properties REIT.

When it entered the market maybe five years ago WeWork was looking for tenant improvements but weren’t willing to offer a guarantee or provide a covenant, Williams said. “And it just really didn’t make sense for owners of assets in the city to engage in a transaction with those terms given the strength of the market.”

Last month, New York-based WeWork was a seemingly unstoppable force. It was the fastest-growing co-working firm in the world with billions invested by SoftBank Group Corp. plus a highly anticipated initial public offering that would unlock even more cash for growth. Now, its IPO has collapsed, its controversial co-founder Adam Neumann has stepped down as CEO and it’s racing to get new financing before running out of cash as early as end of November.

Trudeau Leads In Election But Not by Much (12 p.m.)

Prime Minister Justin Trudeau’s party leads his top rival in safe districts ahead of Canada’s election next week, but is bleeding support to smaller parties while many races remain too close to call, polling shows.

Seat projections by Nanos Research, unveiled Wednesday at Bloomberg’s Canadian Fixed Income Conference in New York, showed Trudeau’s Liberals are on pace to win at least 127 of the parliament’s 338 seats, with the Conservatives next with at least 84 seats. Another 95 seats remain too close to call in the Oct. 21 vote, while smaller parties are on the rise.

The Liberals’ vote is more efficient than the Conservatives’ and translates more easily to gaining districts, Nanos said. More than one in four remain toss-ups, with the election set to be decided in Toronto’s suburbs, known by their 905 area code, and on the Pacific Coast, he said. None of the parties currently has enough support to win a majority, he said.

“It’s battleground 905 and also British Columbia,” Nanos said. The Conservatives are at 33% support nationally, compared with 32% for the Liberals, Nanos polling shows. “In Ontario, the Liberals are still doing well but watch the 905 because the Conservatives need to do better in the 905 in order to do well in the election.”

Infrastructure Investment Getting Harder: Tanyeri (11 a.m.)

Investing in infrastructure across Canada has become increasingly difficult for investors on the private side, pushing many companies into the U.S., according to John Tanyeri, head of infrastructure and project finance at MetLife (NYSE:) Investment Management.

“In 2019, it’s been very hard to invest not only because there’s been less opportunity but also as a natural U.S. liability company, we have to swap everything back to U.S. dollars so given that most of the 3Ps trade relatively tight, when you swap back to USD, it’s made it very difficult for us to match liabilities,” Tanyeri said at Bloomberg’s Canadian Fixed Income Conference in New York on Wednesday.

Canada is also a much smaller market in comparison, making it harder to find investments compared to its southern neighbor, which has a broader scope.

“If we want to grow, our growth has to come from the U.S. — that’s the natural step for most Canadian firms,” said George Theodoropoulos, managing partner at Fengate Asset Management. In the U.S.

To be sure, Canada still has some attractive infrastructure investment opportunities and its strong underlying credit provides investors more security, according to Ruth McMorrow, president of enterprises at Parsons Corp.

“The cost of bidding on a deal in the Canadian market is substantially less than bidding in the U.S,” McMorrow said. In the U.S., “It’s a more litigious society so you have a lot more lawyers involved. But the Canadian market for us really provides great opportunity.”

Still, Canada has some challenges moving forward, Tanyeri said. “When you look at the infrastructure gap, it’s probably anywhere from C$200 to C$300 billion currently,” he added.

Quebec Finance Minister Sees Stronger Growth (10:30 a.m.)

Quebec Finance Minister Eric Girard said the province will raise its 2019 GDP forecast when it releases its economic update on Nov. 7.

The economy is on track to expand by 2.5% or more in 2019, according to economists at Laurentian Bank Securities in Montreal, making the 1.8% estimate in the March budget appear conservative.

“All I commit to say is that it will be higher,” Girard said. All components of the economy, including consumption, labor markets and investments are “very solid.”

Long one of Canada’s fiscal laggards, Quebec has turned into a poster child of budget discipline. Girard is planning to balance the budget for a fifth straight year, allowing the province to set aside hefty reserves to weather a downturn while reducing a debt burden that’s still the second-highest among provinces.

Girard said Quebec aims to raise potential gross domestic product to 2% and the province has the tools to stimulate the economy in case of a slowdown.

A June report showed the preliminary surplus for the last fiscal year was higher than expected, giving the government even more room for maneuver.

The commitment to lower debt has helped Quebec’s borrowing costs slip below those of Ontario, which doesn’t plan to eliminate its budget shortfall until fiscal 2023-2024.

Rosenberg Sees BoC Cutting Rates Four Times (10 a.m.)

The Bank of Canada will have to cut interest rates four times with the Canadian economy facing an 80% chance of recession in the next 12 months, according to David Rosenberg, chief economist at Gluskin Sheff & Associates Inc.

Canada’s economy has little going for it except crude, cannabis and condos, and will be dragged into a global slowdown, Rosenberg said at Bloomberg’s Canadian Fixed Income Conference in New York on Wednesday.

“The global economy is cooling off substantially. We are in a growth recession, and with a lag that’s going to come back and it’s going to hit the Canadian economy,” Rosenberg said. “It’s going to swamp the fiscal stimulus that we’re going to see.”

Rosenberg’s view wasn’t shared by National Bank of Canada Chief Economist Stefane Marion, who sees no rate cut from the Bank of Canada with inflation doggedly around the target. Beata Caranci, chief economist at Toronto-Dominion Bank, sees the central bank beginning to cut in 2020.

So far, the Bank of Canada is bucking global trends and showing no signs that it will cut rates with inflation coming in at 1.9% for September, around its 2% target. And the markets aren’t expecting one either, pricing in a 12% probability for a rate cut by the end of the year.

The consensus view is that slower growth is on the horizon with economists expecting Canadian gross domestic product to decelerate to 1.5% from 1.9% last year. That’s compared with 2.3% forecast in 2019 for the U.S. from 2.9% in the prior year.

“The drivers of the economy continue to be our old friends of housing in particular coming back, but in terms of investment and trade we don’t have a huge amount of optimism surrounding those sectors,” Caranci said during the discussion.

Still, the Canadian economy has remained fairly resilient in the face of global weakness. The labor market continues to be a bright spot with low unemployment, steady job gains and rising wages. The housing market has begun to rebound and Canada reported better-than-expected output in the second quarter.

“The Bank of Canada should be hiking rates, not lowering rates,” Marion said, adding that the fundamentals that underpin the Canadian economy are still quite strong.

While Rosenberg sees a big chance of recession in Canada, Marion sees it at 30% and Caranci sees a 30% to 40% chance.

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