The Nordic high-yield bond market has had a rough ride since 2014, with the plunge in oil prices leading to massive defaults and restructuring in the energy sector. So why might now be a good time to return to this asset class?
We believe there are numerous substantive reasons for the asset class now appearing to have ‘turned the corner’
One fundamental reality is that the Nordic high-yield bond market is today more diversified in terms of sector exposure. In 2009 the energy sector accounted for some 52% of the total market, but this has now fallen to approximately 24%. The sectors that are growing and filling this gap include industrials.
Exhibit 1: Breakdown by sector (nominal outstanding amounts) of the Nordic high yield debt market in 2009 and 2016
Source: Stamdata, as of December 2016
One reason for this transition is that the high-yield bond markets in Sweden and Finland are burgeoning, and these countries’ economies have sectors of significant economic activity other than energy. So, whereas almost the entire high-yield bond market was based in energy industry-dominated Norway in 2009, now Norway accounts for less than 70% of the asset class (see Exhibit 2 below).
Exhibit 2: Outstanding nominal value of high yield debt, by country of domiciliation of issuer for 2009 and 2016
Source: Stamdata, as of December 2016
Furthermore, most of the major restructuring of the energy sector is now behind us. Where restructuring is still continuing, the bonds are priced well down into distressed levels and we do not expect any big surprises there.
Another notable change is that since last autumn, Norway has been regulated by the European Securities and Markets Authority (ESMA). ESMA has ruled that only registered rating companies, like Moody’s, S&P and Fitch, can provide ratings. Previously Nordic shadow ratings, (that is ratings provided by credit analysts at banks), had been a cornerstone of the region’s corporate debt market, allowing smaller companies to issue bonds and reducing issuer costs. As a result the Nordic region, (which includes Finland, Denmark, Sweden and Norway), has the highest share of unrated bonds in Europe, according to Moody’s. Several rating agencies are now ramping up activity and others are launching new rating services in the Nordic region. We expect more companies to be officially rated by mid-2018 and that international investor interest will increase as a result.
In view of all this, we believe we are seeing the Nordic high-yield bond market broaden and mature, in the sense that it can offer a normal level of credit risk, i.e. where there is much less chance of the market being bowled over by an external shock such as plummeting oil prices, as well as a growing proportion of officially-rated issuers and increased international interest.
The Nordic high-yield bond market is short duration, with half of the outstanding bonds being in the form of Floating Rate Notes (FRN). This means that their sensitivity to interest-rate movements is low, so that if interest rates rise, the drop in price of FRN bonds is low, and vice versa. Similarly, the average maturity of Nordic high-yield bonds is short in a global context, and this leads to shorter credit duration. This means that the bond prices are less sensitive to changing risk appetite among investors. If risk appetite among investors is decreasing, the price fall is lower for bonds with shorter credit duration, and vice versa.
These two characteristics should normally mean the asset class is subject to less volatility than one would expect on the European and US high-yield bond markets.
Written on 10 March 2017
For more information about this market, go to www.alfredberg.com
Past performance is no guarantee for future returns. The value of the money invested in high yield debt can increase or decrease and there is no guarantee that all of your invested capital can be redeemed.