Focus on corporate bonds – Nordic supply and demand to increase, says S&P

Historically low interest rates and more costly loans from banks are set to fuel a diversification of issuance of, and more demand for, corporate bonds in the Nordic region, research by Standard & Poor’s suggests.

The credit rating agency notes that the economies in which Nordic companies operate is generally good.

The region’s four economies of Sweden, Denmark, Norway and Finland, are relatively strong compared to much of the rest of Europe. Their economies benefit from record low interest rates, they are seen as safe havens, unemployment is relatively low, and competitiveness is maintained at high levels.

Sweden, Denmark and Norway retain significant surpluses on their external balances, resulting in sovereign ratings of AAA/Stable/A-1+. Finland’s rating is slightly lower at AAA/Negative/A-1+, while Iceland remains the exception with a BBB- rating in place, following the collapse of its banking sector during the 2007/2008 credit crisis.

The countries have undeniably strong economies, but they still face certain economic headwinds. Notably, none of them is immune from the eurozone’s crisis.

The concerns around corporate bonds are slightly different, S&P suggests. Ratings on corporate and infrastructure companies in the region remain skewed to investment grade BBB- and above.

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nordic-issuance2Traditionally, corporate borrowers were the large international companies and utilities, which required access to international bond markets.

However, a number of these have become so-called ‘fallen angels’, S&P says.

These are companies that were initially rated investment grade, but that have been downgraded to a speculative grade. The most recent of these is the Finnish mobile phone maker Nokia.

“In spite of this, we believe that the large Nordic corporates withstood the global financial crisis of 2008-2009 reasonably well,” the report compiled primarily by credit analyst Andreas Kindahl in Stockholm says.

“Proactive operational and financial management helped to quell the market stress. We observe, for example, that many large Nordic corporates cut back on dividends and actively managed working capital to pay back debt and strengthen their financial risk profiles. They also seized the opportunity to implement cost and operating efficiency programs, which we believe have permanently strengthened their competitive positions.”

However, the agency also notes the changing quality of Nordic corporate bond issuers. Currently about 78% of the relevant ratings include a ‘stable’ outlook. Some 4% are ‘positive’. But, 19% are either ‘negative’ or have been placed on S&P’s CreditWatch, which suggests the rating could be heading lower.

The danger comes from the eurozone. This should not be surprising to those who follow the Nordic company Volvo. The Swedish car maker announced in the past month a sharp deterioration in profitability directly linked to poor sales across Europe. Volvo Trucks, a different company, has been working on building increasing flexibility into its employment regime, partly as a parry to fears over weakness in its future-order book – the company became a poster child of the global recession in 2008, when it was famously reported as being hit by a 99% collapse in orders.

“We believe, however, that downgrade activity could accelerate once again if the recession in the eurozone is deeper than our current base-case scenario assumes,” S&P said.

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