News Menu

What Is A Maple Bond?

A Maple Bond is a bond issued in the Canadian fixed income market in Canadian dollars by a foreign issuer. The elimination of the foreign property rules (FPR) in the early part of 2005 brought about significant growth in demand for foreign fixed income and Maple bond issuance. Prior to the elimination of the FPR, registered investors, which included large pension plans and individually managed Registered Retirement Savings Plans, Life Income Funds, Locked In Retirement Accounts, and Registered Retirement Income Funds, were limited in how much they were able to invest in foreign investments. Prior to the elimination of the FPR, investors were limited to investing only 30% outside of Canada.

Foreign issuer bonds are issued in many markets globally: in Canada they are called Maple bonds, in the US they are called Yankee bonds, in the UK they are called Bulldog bonds, in Australia they have Kangaroo bonds, in Japan there are Samurai bonds, and in New Zealand they are called Kiwi bonds. In each of these instances the foreign issuer assumes the currency risk by issuing bonds in the domestic currency of the respective market. What this means is that the foreign issuer of the bond 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, a monthly $50 Canadian coupon payment might cost an American issuer $50 American, but if the exchange rate was to go up a month from now, that $50 Canadian coupon payment would now cost the American issuer $55 American. However, by having the issuer assume the currency risk, this allows investors to invest in these bonds without any currency risk.

This raises the question of why foreign entities choose to issue outside of their domestic market if they have to assume extra currency risk. There are a variety of reasons for this. There may be favorable fixed income markets and relatively attractive interest rates (lower) in other markets, or the issuer may have a need for a particular currency and may not even hedge the foreign currency exposure.
For example, Walt Disney had a currency exposure to the Japanese Yen with the new opening of the theme park in Japan because after revenues and expenses, they were continually left with profit in Yen. Walt Disney, the foreign issuer, can issue a Yen bond and convert it immediately to American dollars (effectively locking in future profits at a fixed exchange rate) and pay back the bond with its future Yen profits. There are numerous other areas to consider, such as the differences in the country’s interest rates and inflation, liquidity needs and so on, most have which has not been covered for simplicity’s sake.

Canada has a well-developed and regulated financial system with an efficient foreign exchange derivatives market which makes it attractive for foreign issuers to raise funds in the form of Maple bonds. As investors, Maple bonds provide an opportunity to further diversify investments beyond domestic issuers.
As with any investment, you need to fully understand the risks and know what you are investing in. The Maple market in Canada continues to grow and has become an important part of the Canadian financial marketplace. Maple issuers may not be as well-known as domestic issuers, but this should not deter you from doing your research and taking advantage of the opportunities.

Richard Usher-Jones
Canso Investment Counsel

Richard Usher-Jones is a designated Canadian Investment Manager and a Fellow of the Canadian Securities Institute. Richard joined Canso Investment Counsel in 2009 as a Vice President and Portfolio Manager. Prior to joining Canso, Richard held positions in Russell Investment most recently as a member of the Canadian Executive Team and was the Pension Manager at Trimark Investment Management.