Thank you, Mr. Chair and members of Parliament. I do thank you for inviting me to meet with you today.
I'm a fixed-income portfolio manger with Phillips, Hager and North Investment Management. PH and N has been investing in corporate bonds for over 25 years and currently invests approximately $18 billion in corporate bonds, many of which are held by defined benefit plans and other retirement vehicles.
We requested to meet with the committee today to express our views on the potential impact of Bill C-501 on credit markets, and we hope these comments will be helpful to the committee and all members of Parliament in considering Bill C-501 as a way to enhance the security of defined benefit pensions for Canada's workers and retirees.
The first point that we wish to make is that Bill C-501 has the potential to affect most of the significant issuers of investment-grade corporate bonds in Canada. Today 60 entities represent about 90% of the market value of all investment-grade corporate bonds outstanding; 54 of these issuers are corporations, and of those 54, 48 report having defined benefit obligations in their public accounts. The impact from a credit market perspective, therefore, is potentially broad.
Second, we believe the cost to existing bond holders and to the issuers of corporate bonds could be in the billions of dollars if unfunded pension obligations are given super-priority or preferred-creditor status. We estimate that existing bond holders could see the value of their investments decline by as much as $4.5 billion. Corporations will also face higher costs for new debt issues, and we estimate that these costs could be in the range of $7 billion to $17 billion. We do not expect these costs would be shared equally across the market. Corporations with large pension liabilities, particularly those with lower investment-grade credit ratings--triple-B, for example--and the investors in the bonds of these corporations are the ones that stand to be most affected.
Third, we believe there is a potential for perhaps unintended consequences that could result from Bill C-501. For example, some corporations could become at risk of a credit downgrade if unfunded pension obligations are given senior credit ranking in the event of insolvency. Credit downgrades increase the cost of borrowing to varying degrees, but as an example, a 150 to 200 basis point or 1.5% to 2% increase in the cost of debt would not be unreasonable for a triple-B rated company that is downgraded to below investment-grade status.
Corporations may also find that they're not able to raise debt when they most need to. Unsecured bond holders will be less willing to lend given a large senior claim that could rank ahead of them should the corporation default, or alternatively, they may demand a punitive interest rate on any new bond issues. Constrained access to capital markets could force more companies into bankruptcy.
I would like to conclude by saying that we do understand the importance of securing retirement benefits for Canadian workers and retirees and we appreciate the objectives of Bill C-501. We also believe that Bill C-501 will impact credit markets in meaningful and potentially unintended ways and we hope the committee will find our raising these points helpful to its deliberations.
Thank you for your attention, Mr. Chair and members of the committee. I look forward to answering your questions.