What is Maple Bond?
- Maple Bond is denominated in Canadian dollars, transacts on the secondary market and gives foreign issuers access to the Canadian debt market.
- Maple bond gives Canadian investors the opportunity to invest in foreign companies without worrying about the effects of foreign exchange fluctuations.
- Elimination of the foreign property rules (FPR) in 2005, which placed restrictions on registered investors access to foreign investments, led to a surge in maple bond popularity.
Understanding the Maple Bond
A domestic company may choose to enter a foreign market if it believes that it would get attractive interest rates in this market or if it has need for foreign currency. When a company decides to tap into a foreign market, it can do so by issuing bonds denominated in the currency of the intended market. A foreign issuer that wants access to the Canadian debt market would issue a bond referred to as the Maple Bond, named in recognition of the national symbol of Canada, the maple tree.
When foreign content restrictions on registered investments were removed in Canada in 2005, maple bonds quickly gained in popularity. Prior to the elimination of the foreign property rules (FPR), registered investors were limited in how much they were able to invest in foreign investments and were limited to investing only 30% outside of Canada. According to Statistics Canada, nearly $23 billion USD worth of maple bonds were invested in 2006. However, their popularity plunged as a result of the credit crisis in 2008, as Canadian investors shied away from debt sold by foreign companies. As rates for Canadian debt have steadily become lower than US debt since 2016, the popularity of these bonds has soared once again as offerings of Maple bonds jumped to a record high of $14.9 billion Canadian (approximately $11.9 billion USD) in 2017.
Maple bonds are Canadian-dollar denominated bonds issued by foreign corporations or borrowers in the Canadian fixed income market. Borrowers will generally issue debt in the Maple Bond market if they can attain funding at an equivalent or lower cost than what is available in other markets. The issuance of Maple bonds is, therefore, affected by how cost-effective it is for the issuer to borrow in Canadian dollars and swap the proceeds back into their funding currency of choice.
Furthermore, since the foreign issuer assumes the credit risk when it issues bonds in Canadian dollars, it is susceptible to any costs or benefits from the changes in the exchange rate of Canadian dollars to the foreign issuer’s currency. For example, an American corporation that issues Maple Bonds may be faced with higher coupon payments in US Dollars (USD) and, thus, a higher cost of borrowing, if exchange rates went up significantly. CAD40 coupons that were paid for at an equivalent rate of USD33 may now cost the issuing company USD36 if exchange rates increased.
Similar to other foreign bonds, such as the Bulldog Bond, Samurai Bond, and Matilda Bond, the Maple Bond allows domestic investors (in this case, Canadian investors) to invest in foreign companies without worrying about the effects of foreign exchange fluctuations. Since investor bear no currency risk from holding these bonds, Maple Bonds are an attractive investment security for Canadian investors. Also, Canadians use these bonds to diversify their fixed-income holdings and earn incremental yield while avoiding foreign exchange risk. In other words, Maple Bonds provide an opportunity to invest in foreign companies without having to manage the effects of currency exchange fluctuations.
Foreign companies can use Maple Bond issues to raise Canadian dollars for setting up operations in Canada. In 2017, The Walt Disney Company, Apple Inc., Pepsico Inc., and United Parcel Service (UPS) Inc. all borrowed from the Canadian market using Maple Bonds. Apple, for example, raised C$2.5 billion ($1.96 billion USD) at a rate of 2.513% from Canadian fixed income investors through AA+ rated seven-year notes, which were in the form of senior unsecured debt.