The cost of preferred creditor status is not evenly distributed among all employers who issue bonds. The impact of Bill C-501will depend on their credit rating, the relative size of their DB plan, their DB plan's funded position, and on prevailing economic conditions. Although the average impact on corporate bond interest rates may only be a quarter of 1% in normal market conditions—for example, moving from 5% to 5.25%—some companies will pay much higher costs than others.
Ian has a page that has the top 60 bond issuers in Canada, all of them investment grade, and visually you can see the ones in orange are the ones rated triple-B. It's those triple-B-rated companies with DB deficits that are likely to experience a downgrade in their credit rating and could see their financing costs increase by 2%, 3%, 4%, or even 5% as a result of the bill. If the rating drops them below investment grade, this would—as opposed to could—result in forced sale of their bonds by most Canadian pension plans.
It's important to note the dichotomy in the Canadian bond market. Most of the corporate bonds that are highly rated—i.e., that pay the lowest interest rates—are issued by financial institutions, whose DB plans tend to be less material relative to their corporate balance sheet and income statement, and by regulated utilities that arguably have an automatic ability to pass the pension costs through to ratepayers. Many triple-B-rated companies are household-name industrial companies, such as CP Rail, Telus, and Bell, where the DB plans are hugely material. In effect, it's Canada's industrial base that would take the majority of the hit if preferred creditor status or super-priority were given to DB plan deficits.
There will be increased volatility for corporate bond issuers, and that may deter foreign investors from investing in Canadian corporations with DB plans. Several fixed income experts indicated to us that they would develop new models to assess risks associated with DB plans, something that many foreign investor firms may be unwilling to do, given the time and complexity involved. By the same token, investment capital could focus more on investment opportunities outside Canada. While many DB plans face risk for their members' employers, market upheavals will happen. No one predicted how far along bond interest rates would affect DB solvency in the last five years. We can absolutely assure you that the best form of security for pension benefits of DB plan members is the existence of financially sound employers, combined with pension benefits legislation that enhances the funding of ongoing plans in a balanced and sensible manner.