18.02.2019

Bonds… Green Bonds

Amid 2018’s whirlwind news cycle, some good news regarding financial innovation got lost in the mix. We want to highlight the progress Canadian financial institutions made in creating and growing socially impactful bonds – specifically green bonds and gender bonds.

First off: What’s a bond? A bond is a financial instrument that represents a loan made by an investor to a borrower – kind of an IOU, but it includes interest. Usually the borrower is a government (municipal, provincial, or federal) or corporation trying to raise cash for a project.

For example, the Government of Canada issues bonds that any old investor can purchase to fund federal projects. As time goes on, that bond grows in value, so that when you eventually sell it, you’ve made some money.

Bonds are typically considered a pretty safe investment, with steady (though not particularly high) returns. A Green Bond is basically the same, but the money borrowed from bond purchasers is directed towards eco-friendly projects.

TD Bank was the first on the scene to issue a Green Bond in 2014 and several government bodies and banks have since followed suit.

The Canada Pension Plan broke records this summer by launching the first ever Green Bond issued by a pension plan globally – and valued at a whopping $1.5 billion.

Joining Green Bonds on the scene are Gender Bonds – bonds that support corporations that are committed to promoting women to executive positions. CIBC launched the first Canadian Gender Bond this summer. In order to be included in the bond, a corporation must have more than 30% of executive positions filled by women.

The logic behind issuing Gender Bonds is two fold, and a bit ironic: Studies show that corporations with greater diversity perform better. And yet, it appears that corporations also need a kick in the pants in order to meaningfully promote women. Qualifying for the capital raised by a Gender Bond acts as a small incentive in that sense.

Socially impactful bonds are arriving on the scene as investors demand more sustainable financial investment options. Beyond the everyday socially-minded investor, all major Canadian pension plans are signatories to the UN’s Principles for Responsible Investing – a public commitment to investing in greener options.

Between 2017 and 2018, issuance of Green Bonds in Canada grew from $1.9 billion to $9 billion. That’s pretty major – and worth celebrating (with locally-sourced organic champagne, obviously).


Green bonds – now those are pretty NEAT!

Everyone’s Favourite Industry to Complain About…

Air Canada soared (hehe) above the expectations of analysts in the final quarter of 2018, reporting record-breaking numbers for both annual operating revenues and Q4 EBITDAR (earnings before interest, taxes, depreciation, amortization, impairment and aircraft rent).

The Montréal-based airline published their 2018 financials on Friday, February 15th, which showed annual figures that benefitted greatly from a strong fourth quarter to cap off the year.

Q4 saw a hefty increase in passengers booked into business class (must be nice), resulting in an increase of 12.5% – or a whopping $92 million –  in business cabin revenue from the final quarter of 2017.

Despite the positive financial results from Q4, Air Canada has noted that costs are expected to rise in 2019 due to the rising price of fuel and the implementation of Bill C-49, a piece of legislation that will see the Canadian Transportation Agency impose greater operation regulations on Canadian airlines and open up competition.

For years Air Canada had a monopoly over the Canadian airline industry with very few (if any) competitors. That changed in 1996, with the introduction of WestJet, an airline offering Canadians an affordable alternative to Air Canada’s airfare. Today, their prices are typically identical, and Air Canada and West Jet combined control around 82% of domestic flights.

It has been difficult for the Canadian airline industry to be disrupted by any meaningful competition. Bill C-49 might change that – it moves the limit of foreign ownership of domestic airlines from 25% to 49% – meaning that upstart airlines can receive investment from beyond the limited pool of Canadian investors. This being said, the ability for foreign airlines to conduct domestic flights within Canada is still prohibited for national security reasons.

The legislation surrounding foreign investment has encouraged the founding of Ultra-Low Cost Carriers like WestJet’s Swoop and Flair Airlines. Others, including Enerjet’s Flytoo and Canada Jetlines, are anticipated to launch in the coming years.

Whether these low cost alternatives succeed in beating out Air Canada and Westjet remains to be seen. Until then, we’ll continue loudly complaining about the cost of flying home for Easter.

Interested in having a look at Air Canada’s full financial statements? You can check them out here.


Airline ticket prices have us saying “help me, I’m poor”.

 


Where are we at with NAFTA…?

Remember our very first newsletter, when we got excited about the renegotiation of NAFTA finally coming to an end? Well, if you’ve been wondering what’s happened since then, here’s the lowdown.

The new NAFTA – or the Canada-United States-Mexico Agreement – was signed by all three countries on November 30, 2018 during the G20 Bueno Aires Summit. Before the agreement can come into force, however, it needs to be presented to each domestic government and ratified by the three parties. After a year and a half of tense trade relations in North America prompted by Donald Trump’s move to renegotiate the world’s largest trade agreement, we may have to wait longer than expected for CUSMA/USMCA/whatever to take effect.

The US had hoped to present the signed deal to Congress on March 1, but US Senator Chuck Grassley announced this week that he was informed by both Canada and Mexico that the countries will not consider ratification until the Trump administration lifts the import tariffs imposed last year. A 25% tariff on steel and a 10% tariff on aluminium were imposed in March 2018 that originally excluded the North American countries. However, on June 1 Trump extended the levies to include Canada and Mexico.

Canada and Mexico immediately responded with their own sets of retaliatory tariffs. These, however, did nothing to reverse the Trump administration’s resolve. At this point, it’s a bit like a game of chicken: who will drop their tariffs first?

Though the Canadian government has not explicitly said that the tariffs are keeping them from presenting the agreement before the House of Commons, Global Affairs Canada has made a statement saying that the tariffs are “illegal and unjustified” and, now that the agreement has been renegotiated, “it is all the more reason for the US Administration to lift its tariffs.”

With the possibility of delays due to the Canadian federal election coming up in October, it is in the best interest of the US Congress – and steel and aluminum producers in all three countries – for the agreement to be ratified as soon as possible to meet the expected implementation date of early 2020.


National security concerns? Plz.