By Fergal Smith
TORONTO, Jan 27 (Reuters) - Dour credit rating agencies and
rising borrowing costs have added to Alberta's misery after a
plunge in crude oil prices slammed its economy, but portfolio
managers have sniffed value in the province's underperforming
bonds.
Standard & Poor's stripped Alberta of its AAA credit rating
in December, while Dominion Bond Rating Service (DBRS) and
Moody's have revised their rating outlook to negative from
stable.
The spread between the yield on Alberta's 10-year bond and
the Government of Canada's 10-year benchmark has widened from 65
basis points nearly a year ago to 122.5 basis points on
Wednesday, its widest since the oil shock began.
0#CABMK= CA/PROV
The province's bond prices are already trading well below
the AAA rating, noted Brian Calder, senior bond trader at
Franklin Bissett Investment Management.
"There is a lot of bad news already baked into current
spreads," said Calder. "There is really good value there and we
have been progressively adding to our position."
Alberta's left-leaning New Democratic Party government,
elected in May, said in October it would borrow heavily to fund
infrastructure in a bid to support the economy.
However, the expected increase in the bond supply has been
largely reflected in the market, said Greg Nott, chief
investment officer at Russell Investments Canada.
"We have been buying Alberta bonds. We do see some value at
these levels and have been increasing our position," Nott added.
Alberta bonds have also performed poorly compared with other
Canadian provinces.
Its 10-year yield has swung from 18 basis points below
Ontario's 10-year bond to 13 basis points above, reflecting
underperformance against a province with a less energy-reliant
economy.
"We think that spread is relatively attractive," said Ed
Devlin, head of the Canadian portfolio management team at
Pacific Investment Management Co.
To be sure, another leg lower in crude oil prices could
trigger further widening in Alberta's spreads.
However, some analysts and investors noted the province
begins from a strong financial position given its low debt
burden.
Its debt-to-GDP ratio is just 4 percent, which the finance
minister has said will be capped at 15 percent. DBRS expects
debt-to-GDP to exceed 15 percent, but its measure includes the
debt of a provincial authority and crown corporation.
"The province has a lot of capacity to deal with the
downturn," said Hosen Marjaee, senior managing director,
Canadian fixed income, at Manulife Asset Management.
(Editing by Jeffrey Hodgson and Lisa Shumaker)