In the banking world, growing institutional demand for PPP exposure has given rise to new business opportunities at a rapidly expanding pace. Bert Clark, head of infrastructure advisory at Scotia Capital for Canada and the US, believes Canada's debt capital markets can now easily support up to $1 billion in a distributed bond issue.
One key data point giving Clark confidence: a $764 million issue of senior secured bonds for Québec's McGill University Health Centre PPP in Montreal, for which Scotia acted as bond underwriter and mandated lead arranger. At final count, there were more than 50 buyers for the issue.
"It was the biggest PPP bond deal in Canada to date," Clark says. "I think 18 months ago people would have been suspicious of whether you could realise that much money in the bond market."
Michael Wolff, head of infrastructure and private placements for Td Securities in Toronto, credits the strong market to an entry of new investors for PPP bond issues, which he terms "public-style buyers".
"One of the things they look for is liquidity in what they're buying," Wolff says. And with 50-plus investors for deals like McGill University Health Centre, there's plenty of such "public-style buyers" which can facilitate liquidity. These include money managers like Feira, Canso and Addenda, just to name a few.
Contrast that with the traditional buyers of PPP bonds - Canadian life insurers like Canada Life, Manulife and Sun Life which typically act as buy-and-hold investors - and it becomes clear that Canada's PPP bond market has become much broader and more liquid than two years before.
This is not to say that bank loans are out of the question. Both Scotia's Clark and TD's Wolff say they still have to put up a competitive bond solution that can go toe-to-toe against a bank loan in any given deal.
"We compete with a bank solution, often with a European bank solution that will go as long as 20 to 25 years," Wolff says. And, interestingly, just as European banks - which largely fed the market in the wake of the financial crisis - are coming back to Canada, Canadian dealers are looking to the bond market. Aside from Scotia and TD, several other home-grown banks, including the Royal Bank of Canada, CIBC and BMO have been increasingly active in capital markets for PPPs.
And as long as the market keeps becoming more liquid, spreads will continue to tighten, making the bond option more competitive. At some point, that could put PPP issuers more on par with large public infrastructure issuers, like the Greater Toronto Airports Authority (GTAA). But not just yet: Wolff observes that in the current market, a buyer of a long GTAA issue could expect a spread of somewhere around 140 basis points over the equivalent Canadian government bond, versus 260 basis points for, say a hospital PPP bond.
"If you're a money manager, you're looking at the relative value between those two types of investments," says Wolff, and, with a 120 basis point difference, the choice right now seems pretty clear.
Agrees Scotia's Clark: "These are high-quality investments where you're earning hundreds of basis points over the equivalent Government of Canada yield and the ultimate payor for these projects is a provincial or federal government."