A SUPPLEMENT TO EUROMONEY/MARCH 1998: NORDIC CAPITAL MARKETS
To bankers from outside the region, the Nordic block (comprising Denmark, Finland, Iceland, Norway and Sweden) has long seemed to present two faces. It is sassy and sophisticated when raising capital in the international markets but soporifically parochial at home. It is far ahead of the rest of continental Europe in its willingness to embrace new structures like tier-one capital and mortgage-backed bonds, yet it still clutches on to an archaic system of A and B class shares which give one shareholder 100 times more voting power than another.
Over the past four years, however, the gap between its local and its international faces has begun to close. Local equity exchanges are booming thanks to a flood of money from UK and US investors and a spate of hi-tech IPOs. Bond-market trading has risen by over 100% in the past two years. At the same time, the convergence of the Swedish krona and the Danish krone with the Deutschmark has made Eurobonds denominated in those currencies extremely attractive to retail investors in continental Europe. Foreign ownership of Nordic assets is now running at around 40%, higher than for virtually any other region in the world.
Meanwhile the increased willingness of investors and issuers to do business with firms other than their house banks has opened up the region’s capital markets to foreign banks. Morgan Stanley and SBC Warburg have secured the prestigious mandate for the privatization of Finland’s energy group IVO/Neste. A number of US investment banks, including Merrill Lynch and JP Morgan, have done well in the M&A field.
Local players have lost out as a result. However, the surge in capital-raising by small hi-tech companies over the past year has helped to compensate for their failure to win big-ticket mandates. Few foreign banks have developed close links with local investors, leading many analysts to predict that local banks can survive the foreign invasion if they focus their energies on maintaining and extending their local placement power.
The big question confronting the region’s banks and stock exchanges has been what to do about the euro. Both risk losing large chunks of their business once the single European bond market finds its feet. Their strategy has been to go pan-Nordic. For example, Denmark’s Den Danske Bank has established a strong platform in the Swedish market through its acquisition of Ostgota Bank. Denmark’s Unibank bought Aros, the Nordic broking arm of ABB in 1996. Both banks have also set up offices in Finland, as have Sweden’s Enskilda and Svenska Handelsbanken.
Attempts to create a pan-Nordic stock exchange have been only partly successful. Earlier this year the Stockholm and Copenhagen stock exchanges decided to merge their equity markets under the Swedish SAX 2000 trading system. Despite the refusal of Norway and Finland to join them, the two exchanges are pressing ahead with integration, and are now talking about uniting their debt-trading systems too. Stockholm’s decision to allow certain stocks to be traded in euros should also permit a number of local companies to be included in any EU index of stocks even though Sweden – unlike Finland – looks set to stay outside the single-currency block.
As in 1996, the Nordic debt markets were relatively quiet during 1997, mainly because of the paucity of natural borrowers from the region and the spectacularly cheap funds on offer in the syndicated loan market. Supply is expected to run short this year too since most of the region’s companies and banks are well capitalized while the sovereign issuers have all cut back their borrowing.
International debt issuance may pick up in 1999, however. Historically, Nordic borrowers have always had very aggressive funding targets, but few have long-term debt ratings. Thanks to clever treasury teams, this has rarely proved a problem: by waiting for the right moment and playing on name recognition, they have been able to attain funds at extremely competitive prices. But in the credit-intensive single European market this may not be possible. For this reason, say some bankers, many will seek ratings and will then issue large benchmark bonds as a way of planting their flag in the new market.
Last year, Svenska Handelsbanken’s $350 million step-up perpetual issue (raised to improve its capital structure following the acquisition of Stadshypotek) was by the far the largest subordinated deal ever to come out of the region. Demand for the product was strong, indicating that this could become a popular way of financing the expected flurry of bank acquisitions.
In 1997 Merita Bank became the first Nordic borrower to issue tax-deductible tier-one capital debt. So far, Finland is the only country in the region to permit these structures although Sweden and Denmark are expected to follow suit later this year. One London-based banker believes we could see as much as $3 billion of tier-one issuance from the Nordic region this year.
Nordic finance is becoming more inventive in other ways. Last year, Volvo carried out an innovative share buy-back which had to be heavily structured in order to avoid the Swedish ban on repurchasing equity. Another company, Fennica, plans to raise over Fmk3 billion ($550 million) in securitized debt, an issue more than twice the size of the biggest Nordic securitization to date.
Much has been made by analysts in recent months of the re-rating of the region. “Investors have finally begun to notice that the Nordic region is much more stable economically than it was before,” says one London-based banker. “Its currencies are much more stable and are in some cases strengthening against the Deutschmark. At the same time, its banks have sorted out their problems and company management is better than ever before.”
But many analysts believe that the local markets, particularly for equity, remain undervalued. They point to the number of Nordic engineering firms which trade at P/E ratios of 10 or less compared with an average of 15 or more in France or Germany. Some are even bullish enough to predict that the stock market will rise by 15% or 20% in 1998.
All change at the house of Wallenberg
Sweden’s omnipresent Wallenberg family seems to be getting serious about restructuring its rambling industrial empire. That could create rich pickings for investment bankers
Through two holding companies, Investor and Incentive, the family controls over 40% of Stockholm’s stock exchange and many of the country’s largest companies. “Nobody moves here without their knowledge,” says one local corporate financier. “They are the spider at the centre of the web.”
But the nature of that web seems to be changing as the family reconsiders its business strategy. Both Marcus Wallenberg, the senior family member on the Investor board, and Claes Dahlback, Investor’s CEO, insist that the long-term aim is to move out of mature industries such as washing machines and trucks into more exciting sectors such as telecoms, IT and medical technology.
The first large disposal came when Investor floated off shares worth Skr20 billion ($3 billion) in truck manufacturer Scania in 1996. In the past 16 months Incentive has sold over $1.2 billion of assets including $148 million-worth of shares in electrical manufacturer Electrolux, $800 million of shares in engineering group ABB and the $225 million flotation of Munters, another engineering company.
Investor has so far been less rigorous in making disposals, and its holdings – in companies including Scania, forestry company Stora and engineering group SKF – dwarf the stakes held by Incentive.
But in January 1998 bankers got the firmest signal yet that the long-awaited disposal programme would shortly be under way when Percy Barnevik, the Investor chairman, announced plans to overhaul the company’s management structure and place greater emphasis on shareholder value. “If you find a company does not come up with growth that exceeds the stock-market average, eventually you must question whether the management is up to the demands,” said Barnevik.
Full details of the proposed changes have yet to emerge. Bo Berggren has already announced that he will resign from Stora and further boardroom changes are expected this year.
A new management structure will make it easier for Barnevik to push through more painful decisions about which businesses to sell. Some of the Wallenberg’s holdings look sure to go to strategic buyers (if any can be found). Saab Automobiles, for example, is already 50% owned by General Motors while Saab’s avionics and aerospace divisions have both been actively looking for partners for some time. Others, such as Electrolux, Scania, Stora and SKF, will certainly require large, internationally-distributed offerings if the Wallenbergs choose to dispose of their stakes.
The mandates for any such deals will be keenly contested. However, Enskilda Securities will clearly be in pole position, having been involved in nearly every equity offering the Wallenberg family has ever done. Morgan Stanley, which led the Scania IPO, and SBC Warburg, which arranged the Electrolux private placement, are also well placed to pick up business. Other banks will need to work hard if they are to squeeze in ahead of these three players.
Wary of upsetting such a valuable client, bankers are reluctant to spell out which stakes will be sold first or when. Electrolux has been hit by the Asian crisis and, like Ericsson, it is currently carrying out a large restructuring programme. Meanwhile, Stora is keen to make new acquisitions, making a disposal unlikely until the outlook is clearer. Analysts believe that the first to go will be SKF.
