Canadian Debt Markets

1

• Canadian Debt Markets
• Corporate Debt Market Growth
• 2001 year-to-date issuance has seen continued
  growth with total corporate bond issuance rising
  10 over the same period last year to nearly 20
  billion year-to-date.
• It is expected that the pace of issuance will
  ease off for the remainder of the year due to
  lower financing requirements and recent credit
  concerns.

2

• Canadian Debt Markets
• Corporate Debt Market Trends
• The corporate sector is becoming increasingly
  important in the benchmark index, now
  constituting 25 of the index vs. only 10 in the
  late 1980s.
• Corporate issuance has grown at an annual rate of
  25 since 1993.
• Growth in Canadian corporate issuance this year
  has not kept pace with the doubling of U.S.
  corporate issuance this year the greater pace of
  which has been due partly to refinancings of
  early redemptions.
• Corporate BBB securities are becoming an
  important part of the Canadian bond market.
• Increased corporate issuance is not only a
  function of decreased government issuance, but
  due to an increased demand for spread product by
  institutional money managers as we look for new
  ways to add value.

3

• Canadian Debt Markets
• Debt Market Trends
• New issue trends in 2001 in the Canadian market
  include
• Continued emphasis on infrastructure issuers,
  totalling 1.7 billion so far this year,
  including 3 issues by GTAA.
• Continued issuance of Bank Tier II innovative
  capital securities, i.e. BaTS, CaTS, BoaTS, etc.
• 800 million BMO BoaTS issued this year
• First bond issue by a Canadian university
• University of Toronto 160 million 30-year bullet
  bond at spread of 27 bps over Ontario (65 over
  Canadas), higher rated than the province.
• Anticipating additional 140 million from UofT,
  and new issues from other universities including
  UBC.
• Introduction of CMBs by CMHC
• Canadian Mortgage bonds 2.2 billion 5 year
  bullet bond backed by pool of NHA insured
  mortgages
• Spread at issue was 16 bps, compared to 15 bps
  for CMHC credit, which had widened from 7 bps
  before the new issue was announced, and MBS at 33
  which tightened from 38 before the announcement.

4
Canadian Debt Markets

• BBB issues are 17 of all new corporate issues
  so far in 2001, continuing the development of
  this market in Canada
• but the Canadian market remains dominated by A
  rated issuers.

5
Canadian Debt Markets

• The Canadian corporate market continues to be
  dominated by bank and other financial issuers,
  but infrastructure continues to grow in the
  Canadian market.
• Banks issued 3 billion, or 18 of all new
  corporate issues so far in 2001, including 800
  million in hybrid securities.

6

• Canadian Debt Markets
• Corporate Debt Market New Issues 2001

7

• Canadian Debt Markets
• Corporate Debt Market New Issues 2001

8

• Canadian Debt Markets
• Credit Spreads
• Global credit concerns have resulted in a general
  upward trend in Canadian credit spreads, nearing
  3-year highs (spreads generally widened an
  additional 10-15 bps after the events of
  September 11 and are likely to continue to face
  widening pressure in the face of continued
  uncertainty)
• This trend had been less severe for
  infrastructure, insurance, and banks until the
  recent tragic events.

9

• Canadian Debt Markets
• Corporate Liquidity
• Institutional investors desire greater liquidity
  from corporate issues as they become a greater
  part of the portfolio.
• Average new issue size this year is 303 million,
  compared to 210 million in 2000 and 110 million
  in 1996, partly due to large infrastructure
  financings.
• Total issuance has been on the rise, but the
  total number of issues has been declining since
  1998 as larger issue sizes dominate, particularly
  for infrastructure and financial institutions.
• Issue size of at least 250 million is now
  considered the minimum for reasonable secondary
  market liquidity.
• New issues have been hot this year, generally
  significantly oversubscribed resulting in
  fractional fills.
• Medium term notes now make up the majority of new
  issues, compared to only 10 in 1993.

10

• Offering Process
• Overview of Canadian Corporate Issuing Options
• In the Canadian market, most corporate bonds are
  issued through a public process.
• The private market is generally used for smaller
  unrated issues which are placed with a small
  number of insurance companies, and a few other
  institutional investors. Private placements
  cannot be sold to retail investors.
• The Canadian market for A and better rated
  issuers is well established.
• The BBB market is growing, but many BBB issuers
  still consider cross-border issuance.
• High yield debt is generally issued in the U.S.
  market, although there have been some high yield
  deals recently in Canada.

11

• Offering Process
• Overview of Public Issuing Options
• For a one-time or first financing in the Canadian
  public market, issuers take advantage of
  short-form issuer status if available and follow
  the public debenture process.
• However, should the issuer wish to establish a
  long-term debt issuance platform, there are
  several options available
• debt shelf
• MTN shelf or
• combination thereof.

Canadian Issuing
Fully Registered
Debt Shelf
Issue by Issue filings(short form)
MTN Shelf
Pricing Supplement only
MTN Program
Debentures
Prospectus Supplement only
Pricing Supplement only
12

• Offering Process
• Private vs. Public Markets
• the issuer can issue long term debt through
  either a public offering or a private placement
  of debt securities in Canada or in the U.S., or
  both.
• The determination as to which form of
  distribution is optimal is a function of the
  issuers requirements and priorities.

13

• Offering Process
• Private vs. Public Markets

14

• Offering Process
• Overview of Public Issuing Options
• The issuer can enter the Canadian public debt
  market through a discrete marketed underwritten
  debt issue via a POP (short-form) prospectus, or
  under a shelf prospectus.
• Under a shelf, either an MTN offering or a
  discrete marketed underwritten issue is possible.
• An MTN program is a continuously offered term
  debt issuance platform which is a further
  refinement of the short form filing arrangements
  and goes a step further in removing the
  documentation process from the issue process.
• An MTN program requires the filing of a debt
  shelf with an MTN carve-out or a dedicated MTN
  shelf. Both contemplate borrowings over a two
  year period.
• Typically, MTNs are distributed on an agency
  (best efforts) basis.
• Although historically some issuers have used the
  MTN process to complete their first or second
  issues, investor response to this format has been
  inconsistent. Investors view MTN programs as
  being less supported by dealers and as a result
  are more likely to not participate.
• Savings on an MTN program for a 10 year are
  approximately 4 bps. This small differential in
  cost is usually insufficient for new or
  infrequent issuers to absorb the additional risk
  of an MTN process. A Shelf filing is most
  appropriate for high quality, frequent issuers to
  the market.
• First time issuers generally use a discrete
  marketed underwritten process via POP prospectus
  with a book building phase to ensure maximum size
  and ensure a successful deal.

15

• Offering Process
• Corporate issuance of MTNs has grown
  dramatically during the past five years.
• MTNs offer
• Considerable flexibility in terms of amount, term
  and timing
• Rapidity of execution
• The possibility for reverse inquiry
• A platform for structured notes
• Cost savings on commissions compared to
  conventional public debentures
• MTNs disadvantages include
• Limited access to the retail distribution network
• An MTN program is most effective for
  opportunistic access - a debenture process is
  better suited to needs of required sizing or
  timing
• Considerable time spent fishing with accounts
  on reverse inquiry
• Continuous issuance potentially hurts spreads.
  Large number of maturities and issues dont trade
  as well in secondary market

16

• Offering Structure
• Issuer
• Determine the issuing entity to maximize the
  rating, with guarantees from parents or
  subsidiaries as needed.
• Issue Size
• Issuers generally launch an initial benchmark
  debenture issue of 150 - 200 million, with
  potential follow-on issuance. For recent
  infrastructure deals larger initial issuance size
  has been common. Initial issue size was more
  typically just 100 million a few years ago.
• To best determine the issue size, the issuer
  often establishes a size range and then build a
  book through the marketing process. At the
  completion of the marketing program, the issue
  would then be sized.

17

• Offering Structure
• Term to Maturity
• Most common terms to maturity in the public
  debenture market are 5, 7, 10 and 30 year
  bullets.
• A 5 year term is most in demand by investors and
  offers the best pricing and lowest execution
  risk, particularly for first time BBB issuers.
• If the issuer has significant initial financing
  needs a multi-tranche issue would be used.
• Covenant Pattern
• The Canadian public debt market covenant pattern
  is very flexible
• negative pledge
• cross-default (can be monetary cross-default,
  non-monetary cross-acceleration).
• The above pattern offers considerable increased
  flexibility versus bank loans.
• Private issues generally contain more covenants,
  which can include both incurrence and maintenance
  tests based on various financial ratios.

18

• Offering Structure
• Issuance Process
• MTNs are generally issued on an agency basis
  and different issuing procedures are available
• Use of exempt lists spreads are posted through
  the dealers with distribution on the basis of an
  exempt list
• The allotment approach spreads are posted
  through dealers on an allotment basis. Any
  allotments unsold after a specified period of
  time are reallocated to dealers with excess
  demand
• Jump ball where the issue is sold on a first come
  first served basis
• Reverse inquiry/lead orders driven by investor
  demand

19

• Offering Structure
• Issuance Process

20

• Offering Structure
• Marketing
• Regardless of whether the issuer chooses to
  launch an MTN program directly or issue
  underwritten debentures, we generally recommend a
  fully marketed conventional syndication process
  including exempt coverage, a lead bookrunner and
  a defined syndicate, and retail participation for
  first time or infrequent issuers.
• Marketing generally consists of luncheon
  presentations for debt investors in Toronto and
  Montreal and possibly, Winnipeg and Vancouver.
  These are generally complemented by one-on-one
  presentations with key investors, and conference
  calls for those unable to attend personally.
• This process is similar for private placements,
  although the number of potential investors is
  much smaller, so often only one group
  presentation is scheduled, or the issue is
  launched entirely through one-on-one
  presentations.
• Subsequent tranches of MTNs are issued with no
  marketing since the MTN platform provides
  continuous disclosure about the issuer and MTNs
  are often issued based on reverse inquiry I.e.
  an investor or group of investors indicates an
  interest in a particular maturity or a specific
  structure.

21

• Offering Structure
• Syndicate
• One of the keys to success for a public debt
  issue in Canada (debentures and/or MTNs) is a
  strong syndicate, defined as market-leading
  investment dealers with strong distribution
  capability (both retail and institutional) who
  will provide consistent trading support, research
  coverage and on-going market intelligence and
  advisory services.
• Issuers generally use a syndicate consisting of 3
  - 4 dealers with a lead or two co-leads.
• The syndicates are increasingly determined by
  participation in bank lending to the issuer.
  This is also true in the U.S. market.
• Cross-Currency Swap
• The issuer may choose to swap a portion to U.S.
  dollars to effectively create a U.S. dollar
  obligation to hedge some U.S. dollar revenues.

22

• Offering Structure
• Timing
• The public short-form debenture issuance process
  takes approximately 6 weeks. Long-form (required
  for first time issuers that are not already
  reporting issuers) takes approxiately 10 weeks.

23

• Offering Structure
• Budget and Documentation
• Principal documentation includes
• MTN Shelf Prospectus
• Covenant Package
• Selling Agency Agreement
• Rating agency presentation

Counsel 35,000 - 75,000 Printing (Prospectus,
Certificate) 15,000 Rating Agencies
Fees 50,000 Trustee 15,000 Filing
Fees 20,000 CDS
5,000 140,000 - 180,000
24

• Offering Structure
• Rating Agency Process

25

• Canadian Fixed Income Money Management
• Who are the investors?
• Insurance Companies
• Pension Funds (mostly managed by investment
  counsellors, except
• OTPP
• OMERS
• Caisse de Depot
• Other government and a few private pension plans
• Mutual Funds
• Investment Counsellors
• Pension money
• Endowment money
• Insurance Money
• Private Wealth