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InsideCanada Summary (April 24, 2015)

Core Content Overview

This newsletter provides an analysis of key economic and financial developments in Canada and North America, with a focus on the banking sector, corporate debt obligations, and the impact of oil price volatility on various industries.

Main Points

1. Canada's Macro Profile: Very Strong

• Canada's (Aaa stable) macroeconomic profile is considered very strong due to a stable domestic market and high institutional strength.
• The economy is relatively diverse, with hydrocarbons accounting for less than 25% of merchandise exports.
• The central government's fiscal position is largely insulated from commodity price fluctuations.
• The Canadian dollar's depreciation supports non-commodity export competitiveness and reduces production costs for non-conventional oil producers.

2. Banking Sector in Canada

• The banking system is highly concentrated, with the seven largest banks holding about 93% of system assets.
• Canadian banks have very high ratings (Aaa stable) supported by strong asset quality and stable earnings.
• The Canadian banking sector is facing mixed earnings in Q1 2015, with some banks shifting toward higher margin, higher risk products.
• CAD depreciation in 2015 impacted results, boosting Capital Markets and US Regional Banking earnings in CAD terms, while inflating RWA (Risk-Weighted Assets) in USD terms.

3. North American Exploration and Production (E&P) Companies

• E&P companies are issuing equity in 2015 to manage liquidity and reduce debt, especially in response to low oil prices.
• Equity issuance in Q1 2015 reached $11.7 billion, up from $0.7 billion in the same period in 2014.
• Speculative-grade companies are using equity proceeds to pay down debt and improve liquidity, while investment-grade companies are also issuing equity to maintain strong credit quality.
• Oil price volatility is expected to continue, but the impact on credit quality is limited due to the ability of companies to manage liquidity through equity issuance.

4. Canadian Corporate Debt Obligations

• Canadian non-financial corporates have about $83 billion of rated debt (investment-grade and speculative-grade) maturing from 2015 to 2019, down 5% from 2014-2018.
• Investment-grade debt maturities decreased by 32% to $45 billion, while speculative-grade maturities rose by 37% to $37 billion.
• Debt maturities will peak in 2019 at $29 billion, representing 63% of total debt maturing during 2015-2019.
• Ten companies account for 44% of total debt maturing, and the energy/natural resources/chemicals industries account for 41% of total maturities.

5. Canadian Broadband Communications Sector

• The government continues to promote competition in wireless broadband through spectrum auctions.
• The AWS-3 auction is expected to begin in March 2015, with 2500 MHz spectrum auctioned in April.
• Growth in both fixed-line and wireless markets is expected to be very slow in 2015, with only 2%–3% revenue and EBITDA growth.
• Credit quality is under pressure due to increased dividend payouts and reduced capital reinvestment, leading to lower free cash flow.

6. North American Airports

• Airport capital spending remains strong globally, including in Canada and the US.
• Canadian airports aim to optimize existing facilities and only expand when traffic growth necessitates it.
• US airports are focusing on facility upgrades rather than expansion due to reduced flight numbers and tighter competition for passengers.
• A backlog of deferred maintenance due to low capital spending in some regions will require increased future spending.

7. Global Corporate Finance Impact of Oil Price Plunge

• The sharp drop in oil prices is expected to benefit industries like airlines, packaged food, and shipping.
• Oil E&P and oilfield services sectors will face significant challenges.
• Moody's has lowered oil price assumptions for Brent crude to $55/barrel in 2015 and $65/barrel in 2016, and for WTI crude to $52/barrel in 2015 and $62/barrel in 2016.
• Lower oil prices will support US consumer confidence and benefit the retail, homebuilding, and consumer durables sectors.

Key Information

• Economic Strength: Canada has a large, diverse economy with high income levels and strong growth potential.
• Institutional Strength: Canada maintains strong fiscal discipline and stable economic and fiscal policies.
• Event Risk: Political risk to Canada's credit profile is very low, with all major parties aligned on fiscal goals.
• Debt Maturities: While total corporate debt obligations have slightly declined, maturities are expected to peak in 2019.
• Equity Issuance: E&P companies are issuing equity to manage liquidity and reduce debt, with significant activity in Q1 2015.
• Currency Depreciation: CAD depreciation is affecting RWA and earnings, with both positive and negative implications for the banking sector.
• Competition in Broadband: Government efforts to promote competition are ongoing, but challenges remain for wireless-only entrants.
• Oil Price Impact: While oil price volatility is a concern, Canada's diversified economy mitigates credit risks.

Conclusion

The newsletter highlights Canada's resilient macroeconomic environment, supported by strong institutional frameworks and a diversified economy. Despite challenges from oil price volatility and economic uncertainties, the Canadian banking and corporate sectors are adapting through strategic equity issuance, capital spending adjustments, and policy alignment. The impact of low oil prices is uneven across industries, with some benefiting while others face significant financial strain.