Investors warm up to Alberta government bonds after wildfire

By Fergal Smith
TORONTO, May 13 (Reuters) - Portfolio managers see value in
Alberta government bonds after a massive wildfire in the oil
sands region spooked investors already worried by the Canadian
province's oil-related contraction and rising deficit.
Alberta traditionally has been able to tap the bond market
at a lower cost than its bigger provincial counterparts, Ontario
and Quebec. But that has been up-ended by the roughly 60 percent
drop in oil prices since June 2014.
The province's bonds have underperformed those of its peers
as the oil collapse devastated the economy. Alberta's gross
domestic product shrank 4 percent last year and its new
left-leaning government has projected higher deficits for this
year and 2017 as well as a surge in borrowing.
The yield on Alberta's 30-year bond traded at 3.21 percent
on Friday, 21 basis points above Ontario, with the spread having
widened 3 basis points since the wildfire broke out last week,
cutting oil sands output.
But portfolio managers expect the province to have the
financial strength to overcome the crisis, noting its low stock
of debt and ability to introduce a sales tax if oil prices don't
recover.
"Any near-term weakness attributed to news of the fire
situation will likely be temporary, and minor in the big
picture," said Brian Calder, senior bond trader at Franklin
Bissett Investment Management.
The lost oil production will certainly weigh on Alberta's
economy in the second quarter and the province is already in the
crosshairs of ratings agencies. Moody's Investors Service last
month became the latest agency to downgrade Alberta, stripping
the province of its Aaa credit rating.
Investors, however, expect wildfire-related costs to be
shared with the federal government and insurance industry and
see rebuilding efforts adding to economic growth later in the
year.
"For long-term holders there is value in Alberta's bonds,"
said Hosen Marjaee, senior managing director for Canadian fixed
income at Manulife Asset Management. He prefers them to bonds
issued by Ontario, Quebec and British Columbia.
Alberta's financing requirement has jumped 38 percent to
C$14.1 billion this fiscal year and is set to climb further in
2017-2018, while its debt as a percentage of GDP is projected to
rise to 15.5 percent in 2018-2019. In comparison, Ontario's debt
is more than 40 percent of its GDP.
"If you look at Alberta relative to other quasi-sovereign
credits around the world, it's in very, very good shape," said
Ed Devlin, head of Canadian portfolio management at Pacific
Investment Management Co.
"They don't have the investor base that the larger provinces
have ... so those investors have to start to feel comfortable
with Alberta and the volatility associated with commodity
prices," he added.