In the May issue of The Sovereign Individual I’ll be making the case for deeply discounted senior and subordinated Canadian bank debt or investment grade corporate bonds.

Credit spreads for this sector remain historically wide and offer great value while denominated in a fundamentally stronger currency than the U.S. dollar and even the euro. In fiscal 2009, Canada will record its first fiscal budget deficit in 33 years following the passage of a spending package earlier this year to boost domestic spending and consumption.

In a world mired by junk fiat paper and the long-term decline of our purchasing power, the Canadian dollar is the most sober currency in a bar filled with drunks – namely the U.S. dollar, sterling and the euro, among many others.



With the capital structure still largely uncertain for American, British and several other European banking systems, investors have largely shunned corporate bank bonds this year. Despite the recent Geithner plan revealed on Monday to seed a toxic asset platform to help banks clear bad assets, the odds are high that several of the largest U.S. banks will nevertheless become partially or fully nationalized before this credit crisis is finally over. That trend is already underway in Ireland, the United Kingdom and Germany. More countries will have to nationalize their biggest institutions.

As stock markets worldwide have skyrocketed more than 20% since March 9, credit spreads for bank and non-financial services investment grade debt have widened, including Canadian bank debt. That sentiment should change as we progress through 2009 because the fundamentals for Canadian banks are far superior to other G-10 financial sectors.

Uncertainty is something Canadian bank debt investors don’t have to be concerned about. Canada’s financial institutions remain an oasis of calm compared to the devastation suffered across other banking systems.

According to Moody’s, two out of seven AAA credit ratings assigned to global banks are based in Canada. Compared to the dilution still underway for most bank shareholders, Canadian banks have issued just C$9 billion ($7.4 billion) of new equity and preferred shares – hardly a dent compared to the billions raised by other banks.

To be sure, Canadian banks are not immune to write-downs. The Canadian banking sector has not been immune to global investor sentiment; banks remain more than 40% below their all-time highs in late 2007.

In the first quarter the sector did raise provisions for bad loans as the economy suffers a severe contraction in output; over 70% of Canada’s exports head to the United States – the largest two-way trading relationship among countries in dollar terms. Still, Canadian banks never made zero-down mortgage loans during the property boom; homeowners are required to deposit a 25% down-payment, unlike the go-go lending that occurred in the United States and Britain.

Canada is an island of relative calm compared to other economies as the banking system remains largely solvent and not requiring government assistance. Since the advent of the credit crisis 19 months ago, not a single Canadian bank has requested federal assistance and most have even reported profitable results despite commercial paper losses in 2007-2008.

Ahead of the G-20 summit in London next week, banking supervisors and regulators are looking to the Canadian model to inspire new laws to safeguard the financial system. A natural progression of that admission is to buy undervalued senior and subordinated Canadian bank debt now as credit spreads eventually decline.