ANALYSIS-Canada debt market thaw underpinned by rate pledge

* Canada corporate debt issues at highest level since Sept

* Bank of Canada rate pledge supports investor appetite

* Coupon payments, improving data, profits support market

TORONTO, May 14 - The thaw in Canadian credit in recent weeks, during which firms have sold billions of dollars of new bonds, looks likely to last, underpinned by a central bank pledge to keep rates at a historic low until mid 2010.

The warming market, highlighted by offerings from miner Teck Resources <TCKb.TO> and grocer Loblaw <L.TO>, marks a drastic turnaround from its frozen state last year, when many companies couldn't sell any debt or could do so only on unfavorable terms.

Backing the change, part of a global trend, are signs that the economic downturn is slowing, and, analysts say, the billions of dollars of coupon payments coming due on low-yielding government debt, some of which will find its way into issues with higher payouts.

"As long as investors are earning zero percent in risk-free investments they will be forced out of their comfort zone," said Sheldon Dong, fixed-income analyst at TD Waterhouse Private Investment.

Dong said the Bank of Canada's promise last month to leave its key interest rate at a record low of 25 basis points for more than a year, assuming inflation remains tame, has spurred risk-taking and should get money flowing in various parts of the market.

Canadian companies have placed more than C$9.98 billion ($8.5 billion) of bonds so far in May, according to Thomson Reuters data, the highest monthly total since September, when the collapse of Lehman Brothers triggered market panic.

Activity surged at the start of the month when Teck launched a $4.225 billion high-yield bond issue.

Since then the market has seen new Canadian dollar issues <NEWISSUFH> by firms such as Loblaw, phone companies Manitoba Telecom <MBT.TO> and Bell Aliant <BA_u.TO>, and pipeline operator Enbridge Inc <ENB.TO>

There were moments the credit-market opened earlier in the financial crisis, but they were brief and not accompanied by the big rally in equities and the raft of encouraging economic data that have marked the recent thaw.

Toronto's key stock index is about 30 percent above the five-year low it hit in early March and several key Canadian economic reports, including recent jobs data, have surged past expectations.

"Part of it is the belief that if this isn't the bottom of the market then we are pretty close, and at these credit levels they represent a very good buying opportunity," said John Tkach, head of Canadian debt capital markets at Scotia Capital.

"So if we continue to see improvement in signs that the economy is strengthening and that we are out of the woods, then this tone should continue."

CORPORATE RESULTS GIVE SUPPORT

Corporate earnings have also been cited as helping unfreeze the credit market. A good number of quarterly results, while weaker than a year earlier, have met or beat analysts' expectations, making investors more comfortable in lending money.

"There continues to be economic uncertainty and I think volatility is still going to be something that you have to be cognizant of," said Chris Seip, head of Canadian debt capital markets at RBC Capital Markets.

"But the credit market foreshadowed the deterioration in equity markets and investors are now looking to participate in the recovery of financials and the overall economy, and are being enticed by historically wide credit spreads."

Tkach warned that the risk remains that credit activity will tighten again if unforeseen corporate bankruptcies or financial results shake confidence in the recovery.

Peter Bethlenfalvy, co-president at DBRS Ltd, said he wants to see sustainable job creation, healthy profits from banks with no loan losses and gross domestic product growth before he considers calling an end to the credit freeze.

"There are encouraging signs but we are far from out of the woods," Bethlenfalvy said.

"Signs of optimism, but don't get carried away."