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Skip Navigation LinksHome :: Back Issues :: Corporate issuers to the fore

October 1999

Corporate issuers to the fore


Corporates from Scandinavian countries in and outside the eurozone have rushed to the debt capital markets this year. Although pricing isn't especially attractive, corporate treasurers across the region need new sources of funding to replace the shrinking bank loan market. Those operating in restructuring industries are glad that a new European corporate bond market provides long-term finance, even for lesser-rated issuers. But it may become harder to do successful deals. Charles Piggot reports.




Snuff, puff and paper go to euroland

Salomon Smith Barney managing director Eirik Winter, head of the bank's Nordic capital markets desk, has every reason to be pleased. In mid-September his team held three out of four Eurobond mandates for Scandinavian corporates then preparing to come to the markets. A year ago, this level of Scandinavian activity would have been hard to imagine.

Overall, 1999 has been an exceptional year for European corporate Eurobond issuance and Scandinavia has been no exception.

A heady mix of rising merger & acquisition activity and the creation of a single-currency investor base at a time when loan margins are rising has challenged many of the region's corporates to find alternative methods of funding and many have chosen to issue Eurobonds for the first time. European investors' increasing appetite for corporate credit and the creation of a real credit market in Europe is radically changing the way the region's corporate treasurers borrow money.

"There has been a dramatic change," says Winter. "Everyone had been hoping that a US-style capital market would come to Europe with the single currency. But we've been surprised at just how fast this has exploded."

Since Scandinavia's first corporate euro Eurobond at the turn of last year - a landmark seven-year €200 million ($212 million) deal put together by Salomon for Finnish paper company Metsa-Serla - there has been a steady stream of Nordic corporate Eurobonds.

The success of the Metsa-Serla deal proved that there was an alternative to bank finance and that lower-rated corporates are now welcome names in the Eurobond market.

This year's Scandinavian bond issuers have included Ericsson, ABB, Investor, Telenor, Vattenfall, TeleDanmark, AssiDomän and Sonera. Some of these borrowers, for example Vattenfall, are becoming frequent issuers.

"At the time of the Metsa-Serla deal, a lot of people were sceptical," says Winter. "They said that the company was coming too early, that the market was not ready for triple Bs, particularly from a difficult sector like forestry. I'm the first to admit that it was a challenge, but at the same time we had to weigh this against the fact that if we had waited until January or February, we knew that there would be a pipeline building and it would be hard to get the focus from investors."

The strategy paid off and Salomon considers the deal a huge success. "We went for 120bp over the seven-year Bund and the deal traded in very quickly to around 100bp over. It has performed extremely well."

Winter draws a comparison with subsequent Eurobond issues from better-rated credits that have not performed as well as the Metsa-Serla issue. He says: "We got a lot of focus because we were the first out into the market. Some other deals have been a little less lucky with their timing. There have been a lot of competing roadshows out there and with relatively small issues it is always hard to get investors' attention. Some [Scandinavian deals] have not received the recognition they deserve from the market."

But there have also been critics of the high price paid even for more successful Eurobond deals. When the Metsa-Serla issue came to the market, competitors were quick to accuse Salomon of creating an unpopular price level and distorting the market for better-rated issuers. They pointed to similar Scandinavian deals in the syndicated loan market coming in at just 20 basis points over Libor.

However, with the increasing scarcity of banks willing to make loans at rock-bottom prices, Scandinavian corporates are more and more forced to pay the price and issue Eurobonds. Says Winter: "Metsa took a strategic view that it wanted to access sources of funding other than the bank market and it has paid off for them."

So far, most Scandinavian deals have been modest in size by the standards of a European corporate bond market that has grown used to e1 billion issues. But bankers expect deal sizes to increase soon.

The €1 billion mark has already been surpassed with Ericsson's Eurobond brought by Salomon and ABN Amro in June. The two-tranche deal - a €650 million five-year tranche and a $500 million 10-year tranche - easily raised more than €1 billion.

Other billion euro plus deals are set to follow. On September 17, Volvo announced a €1 billion five year Eurobond in the wake of its bid to take over truck maker Scania. The A3/A-2 rated borrower is coming to market to help finance the merger of its own truck division with truck maker Scania following the sale of its car business to Ford. Norsk Hydro also announced that it would issue a large, longer-term inaugural Eurobond issue at the beginning of this month via ABN Amro.

Two billion and beyond
Many bankers think that such names as Volvo and Ericsson could now launch deals of up to €2 billion and perhaps beyond. Says Thor Askeland, head of the Nordic desk at Lehman Brothers in London: "There are quite a few Scandinavian corporates that have the balance sheet to do billion plus deals."

Before details of the Volvo Eurobond were confirmed, there had been speculation that the final deal size could top €2 billion, surpassing the Ericsson deal as the largest Scandinavian corporate Eurobond to date.

As the region's borrowers gain more recognition in the Eurobond market, bankers note a change in attitude on behalf of their clients. Says one: "In previous years we would have gone to corporates and suggested this or that deal and they would have said: 'Why would we want to do a bond deal when we can get cheaper bank credit?' But this year the reaction has been much more positive. Treasurers and chief financial officers want us to come and talk to them and they want to hear what is happening in the market. They have Reuters screens and are beginning to follow what's going on in the markets. After you do a deal and call them up to tell them about it, now they say: 'Yes, we saw that, congratulations.' Two years ago they would say: 'That is great, but what has it got to do with us?'"
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