Debt capital markets: Nordic corporates turn away from banks

By:
Duncan Kerr
Published on:

Basle III forcing structural shift; SME sector key growth segment

A structural shift in corporate financing in the Nordic region is accelerating, as companies turn away from traditional bank lending to access domestic and international capital markets funding.

The development could lead to a sharp rise in domestic bond issuance in particular, as small-, medium- and large-cap Nordic companies seek to diversify funding and lock in competitive pricing levels and deep local market liquidity.

Nordic postal company PostNord AB provided the most recent example of this in September when it sold SKr2 billion ($303.25 million) of five-year bonds – one of the largest unrated corporate bond issues in the Swedish market. Swedish telecoms company Tele2 AB’s SKr2.3 billion bond sale in May is the largest to date.

Higher capital requirements for banks under Basel III regulations are one of the fundamental drivers of this structural shift as bank lending to companies becomes restricted and loan costs rise, according to a report from rating agency Standard & Poor’s in September.

"These [regulations] are likely to increase banks’ incentives to lend for shorter terms and reduce the amount of bank lending available, thereby pushing up the cost of bank borrowing," notes Andreas Kindahl, primary credit analyst at S&P in Stockholm.

He adds: "As banks tighten their lending standards, companies are coming under pressure to explore other funding options."

Henrik Arnt, senior credit analyst at Danske Markets in Copenhagen, says that while the structural shift has been playing out for the past couple of years, "we could still see room for further development among smaller companies and lower-rated companies. In this [smaller and lower-rated companies] segment, it is so far primarily the [Norwegian krone] market that is adequately developed on the back of a significant investor base."

However, market participants are bullish about the potential growth of the domestic corporate bond markets in Denmark, Finland and Sweden, which is perhaps the most developed after Norway.

Nordic corporate funding 2006 to 2012

Peter Hjalmarson, group treasurer of Sweden’s Getinge, a specialist medical equipment and technology company, said during a Euromoney conference in Stockholm in September that part of the allure for companies was the flexibility and cost of funding that could be achieved in bonds relative to bank loans.

"The new regulatory environment may be forcing companies to access capital markets funding, but traditionally it has been expensive and now it is more affordable," he said.

Getinge sold its first bond in May – an unrated SKr1 billion three-year floating-rate note priced at a spread of 190 basis points over three-month Stibor.

Hjalmarson added: "The primary benefit to us of accessing the capital markets is flexibility. Getinge has ambitious growth plans – aiming to double in size in five to seven years – and the company needs flexibility to fund this growth."

Björn Lindström, group treasurer of Vasakronan, Sweden’s largest real estate company and one of the country’s largest unrated corporate borrowers, said during the conference that he expected the Nordic domestic corporate bond market to grow as more companies sought to benefit from "funding diversification and lower financing costs".

However, Lindström says one of the main drawbacks of capital markets funding is refinancing risk, because working with 20 bond investors tends to be a harder and more time-intensive process than working with one or two lending banks that the company has had a close relationship with for years.

This process could be further drawn out if rating agencies are part of the negotiations, but increasingly Nordic companies are choosing to raise capital on the domestic markets without a credit rating from one of the big three agencies.

Hjalmarson said that the "Swedish market is very open to unrated issuance".

For companies regularly accessing the international capital markets, ratings are still required, even if their value is questionable.

Kjetil Kjelvik, head of global capital markets at Volvo, said during the conference that the company needed to have a rating because of the regularity with which it accessed the capital markets of the US, Canada, Japan and Europe.

However, he added: "Rating agencies’ views were quite volatile during 2009 and 2010, and we had our outlook changed, which had a severe impact on us. Their worth has question marks."

Although the development of the domestic capital markets in the Nordic region is well under way, there remain some hefty impediments to its growth.

Kindahl at S&P argues that several factors will slow its development, not least local banks being generally well capitalized, liquid, and free from some of the pressures their European peers are under to trim their lending books.

In addition, Kindahl says transparency around credit risk is "relatively low, required investment amounts are high, domestic bonds generally lack secondary market liquidity, and investors have limited choice given a shortage of rated companies."

Growth is still at an early stage but the momentum is beginning to attract interest from international investment banks keen to strengthen their local capital markets franchise.

Martin Bendixen, head of market operations at Electrolux, said during the conference that foreign banks were "crawling back" to Sweden and the broader Nordic region on the hunt for new business.