What is Maple Bond?

Maple Bond is denominated in canadian dollars (CAD), transacts on the secondary market and gives foreign issuers access to the Canadian debt market.

Key points to remember

  • Maple Bonds are denominated in Canadian dollars, trade on the secondary market and give foreign issuers access to the Canadian debt market.
  • Maple bonds give Canadian investors the opportunity to invest in foreign companies without worrying about the effects of exchange rate fluctuations.
  • The elimination of the Foreign Property Rules (FPR) in 2005, which placed restrictions on registered investors’ access to foreign investment, led to a surge in the popularity of maple bonds.

Understanding Maple Bond

A domestic company may choose to enter a foreign market if it believes it would become attractive interest rate in this market or if he needs 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 target market. A foreign issuer wishing to access the Canadian debt market would issue a bond called the maple bond, named in recognition of Canada’s national symbol, the maple tree.

When restrictions on the foreign content of registered investments were removed in Canada in 2005, maple bonds quickly gained popularity. Prior to the elimination of the Foreign Property Rules (FPRs), registered investors were limited in the amount they could invest in foreign investments and were limited to investing only 30% outside of Canada. According to Statistics Canada, nearly US$23 billion in maple bonds were invested in 2006. However, their popularity dipped following the credit crisis in 2008, as Canadian investors turned away from debt sold by foreign companies. While Canadian debt rates have steadily fallen below those of U.S. debt since 2016, the popularity of these bonds has once again soared as maple bond issuance hit a record high of 14 .9 billion Canadian dollars (about 11.9 billion US dollars) in 2017.

Maple bonds are bonds denominated in Canadian dollars issued by foreign companies or borrowers in Canada. fixed income market. Borrowers will generally issue debt securities in the maple bond market if they can obtain financing at a cost equivalent to or lower than that available in other markets. The issuance of maple bonds is therefore influenced by the profitability for the issuer of borrowing in Canadian dollars and exchanging the proceeds for the funding currency of its choice.

Moreover, since the foreign issuer assumes the credit risk when it issues bonds in Canadian dollars, it is likely to suffer the costs or benefits arising from fluctuations in the exchange rate of the Canadian dollar against the currency of the foreign issuer. For example, a US company that issues maple bonds may face coupon payments in US dollars (USD) and, therefore, a higher cost of borrowing, if exchange rates rise significantly. CAD 40 coupons paid at an equivalent rate of USD 33 can now cost the issuing company USD 36 if exchange rates increase.

Similar to other aliens obligationsas the bulldog link, samurai bondand Matilda Bond, the Maple Bond allows domestic investors (in this case, Canadian investors) to invest in foreign companies without worrying about the effects of exchange fluctuation. Since the investor does not bear any currency risk associated with holding these bonds, maple bonds are an attractive investment security for Canadian investors. In addition, Canadians are using these bonds to diversify their fixed income holdings and earn extra yield while avoiding risk of change. In other words, maple bonds offer the possibility of investing in foreign companies without having to manage the effects of fluctuations in exchange rates.

Foreign companies can use maple bond issues to raise Canadian dollars to set up shop in Canada. In 2017, The Walt Disney Company, Apple Inc., Pepsico Inc. and United Parcel Service (UPS) Inc. all borrowed in the Canadian market using maple bonds. Apple, for example, raised C$2.5 billion (US$1.96 billion) at a rate of 2.513% from Canadian fixed-income investors through AA+-rated seven-year notes, which were in the form of senior securities. unsecured debt.

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