In a deal expected to open up the Canadian market for junk bonds, RBC Dominion Securities led a Canadian-denominated issue for Clearnet Communications Inc. last week.

The deal, for about $240 million, is believed to be the largest Canadian junk bond issue. It was only the fourth Canadian-denominated high-yield issue this year.

CIBC Wood Gundy Securities Inc., Morgan Stanley, Dean Witter, Discover & Co., and Merrill Lynch & Co. co-managed the deal.

"RBC and CIBC were unique in their confidence level in the size of the Canadian demand for discount notes, and they proved to be correct," said Robert McFarlane, chief financial officer of Clearnet, an Ontario personal communications systems provider.

With inflation at a 30-year low, and the government running a budget surplus, Canadian investors have been searching for yield. Canadian high- yield mutual funds have been popping up at a healthy clip.

That is a sea change for Canada. As recently as 18 months ago, companies whose credits were rated lower than BBB were forced to get bank loans, or to market their issues in the United States.

Clearnet will use the proceeds from the zero-coupon notes, which are due 2007, to close a funding gap and meet a $1.25 billion capital requirement for its operations until 1998.

The Canadian high-yield market "will be growing," said Jay Bloom, co- head of high-yield at CIBC Wood Gundy, "and we're optimistic about its prospects. The deal shows the development of our situation as a power in the high-yield marketplace and the ability we have to deliver cross-border financing."

Canadian Imperial Bank of Commerce had been Clearnet's traditional relationship bank.

While Royal Bank of Canada has no formal high-yield group, it is planning to build up its high-yield capabilities in New York. It already has about 30 bankers in sales and trading in fixed-income debt.

"Clearly, expansion in the U.S. high-yield market is likely in the cards going forward," said Gordon Nixon, vice president and director of global investment banking at RBC Dominion Securities.

Canadian bankers said that competition from U.S. securities firms is clearly present. But whereas U.S. firms can sell Canadian issues to U.S. investors, their ability to operate solely in Canada is still relatively small.

"The U.S. firms can compete for high-yield debt, but they don't have the same degree of placement capability in the Canadian market as the Canadian banks," Mr. Nixon said.

Mr. McFarlane of Clearnet said recent Canadian-denominated high-yield issues for Scott Paper, Vancouver; Rogers Communications Inc., Toronto; and Precision Drilling, Calgary, had "legitimized that there was a market in Canada."

Despite offers from other firms to "buy" its high-yield issue, Clearnet announced the appointments of Royal Bank and the other co-managers July 15.

After a whirlwind roadshow that covered nine major Canadian and U.S. cities in seven days, Clearnet opened the books last Tuesday. The issue was three times oversubscribed, with 40% sold to Canadian firms.

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