Canadian companies are issuing second and third-class paper. Canadian pension funds are buying it, often at inflated prices, because they have no option.
This is the hot-house effect of the Canadian tax law, which allows the pension funds to keep their income tax exemptions only if they invest 90% of their portfolio inside Canada.
So strictly is this interpreted that any investment in the Canadian operations of IBM, General Motors or Chrysler must count as pan of the 10% permitted foreign investment, because these Canadian subsidiaries are wholly-owned by their US parents.
The description of Canadian equity issues as "second and third-class" was given to Euromoney by a Toronto investment adviser, William S. Allen, of Allenvest Group, Toronto.
He pointed out that Canadian corporations had been able to issue and sell non-voting stock, which the pension funds have been virtually forced to buy, since no voting stock is available to them.
"Equity is the cheapest way to finance a corporation, and this situation enables corporations to sell equity without giving up any element of control," Allen said.
'And Canadian pension funds, which need representation in certain industries for reasons of liquidity, quality and size, have to buy these issues, because the 10 % foreign property rule traps them in Canada.