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Why Do American Companies Raise Money in Canada?

Canadian corporate bond market lets companies access more investors and borrow money at a lower cost.

When Apple decided to issue bonds in Canada, investors jumped at the chance to take a bite of the global giant.

But Apple was only one of several U.S. companies that took a trip south in 2017, as a combination of attractive prices, higher demand and lower domestic issuance also brought Pepsi, UPS and AT&T into Canada.

maple revival

maple revival

For such companies, “diversification of (their) funding is a primary driver,” said Bill Girard, vice-president and portfolio manager with 1832 Asset Management.

“It also raises their profile in countries where they’re also operating.”

As a company starts to issue more corporate bonds to meet its growing capital needs, it usually tries to diversify where it can go, and the more markets that know it, the better.

“If you issue repeatedly in the same market all the time, the market is going to start pricing that in, and widen your spreads out,” Girard said.

A U.S. company that has operations in Canada may want to keep some of the Canadian dollars it raises to fund its local operations, but often times, the money gets converted back to U.S. dollars through currency swaps.

“In a lot of these transactions, when you see a Canadian company issue in U.S. dollars, or an American company raising in pound sterling or Canadian dollars, they’re then just swapping the currency … into the currency that they actually need,” said Laurence Booth, a professor of finance with The University of Toronto’s Rotman School of Management.

Dealers in Canada may come up with a great deal for a company like Apple, for instance, because big Canadian institutions don’t have any Canadian dollar debt issued by Apple.

Apple can then take that great deal and swap the currency into U.S. dollars in the swap market.

The difference between a rate of 4.96 per cent and of 5 per cent may seem small, but it adds up to a significant amount of money when you’re dealing in millions or billions of dollars.

“They end up having financed essentially in U.S. dollars at a cheaper rate,” Booth said.

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