Dearth of Danish Credit Spurs Underwriting
ABG Sundal Collier Holding ASA (ASC) is adding as many as 20 bankers in Copenhagen as it seeks to profit from demand for corporate bonds amid a dearth of bank credit in Denmark.
“It’s an important reason to set up in Copenhagen,” Thomas B. Lindquist, who was hired last month by ABG to lead the Norwegian investment bank’s push into Denmark, said in an interview. He left a similar position at Nordea Bank AB (NDA), the Nordic region’s biggest lender.
Danish firms are turning to corporate debt markets to escape bank lending cuts that the Confederation of Industry warns are getting worse. That’s attracting investment banks including Deutsche Bank AG (DBK), which opened its first office in Denmark last year, as stricter global regulatory standards boost the appeal of capital-light options such as bond underwriting. Danske Bank A/S, Denmark’s biggest lender, said this month it also plans to expand its corporate finance unit.
“We expect corporate bonds to be a growing market in the Nordics,” Philip Asp, managing director at Deutsche Bank’s capital markets unit in Copenhagen, said in an interview. “In contrast to some other areas, we don’t expect to reduce headcount in this area and I’m hoping I will eventually be able to start hiring again for this business.”
Corporate demand for alternatives to bank loans is growing in Denmark. The Confederation of Danish Industry estimates two thirds of its 10,000 members have limited access to bank loans and said this month that the situation is getting worse.
In Denmark, the need for funds is most acute among small- and medium-sized enterprises. That means banks that cater to companies seeking to sell less than 500 million euros ($670 million) stand to win market share, Lindquist said.
“It’s one of ABG’s specialties as we do both the bigger listed transactions, but also the smaller ones,” he said. “ABG has a very strong placing power when it comes to distribution of bonds to global investors.”
ABG helped advise on the equivalent of $700 million in corporate debt sales last year to rank 22nd in the Nordics, just ahead of Societe Generale SA (GLR), data compiled by Bloomberg show. SEB AB of Sweden was the region’s busiest underwriter, followed by Nordea. The data cover bonds sold by companies based in Scandinavia and issued in dollars, euros or Nordic currencies.
ABG’s deals included a 1.4 billion Norwegian kroner ($250 million) debt sale for Fred. Olsen Energy ASA (FOE) and a 400 million- krona ($61 million) issue for Sweden’s Ferronordic Machines AB, according to Bloomberg data.
The strategy of targeting corporate debt underwriting to offset tighter capital rules is a clever one, according to Fridtjof Berents, an analyst at Arctic Securities ASA in Oslo. He predicts more lenders will turn to this model to generate profits.
“Moving more corporate lending into bond markets will tie up less capital and allow banks to sustain client relationships,” Berents said. “Besides cutting costs, it’s one of the few ways banks have left to increase return on equity.”
ABG’s shares have gained 36 percent this year, outperforming the 43-member Bloomberg index of European financials, which is up 18 percent in the period.
Danske Bank is also adjusting its business with a view to underwriting more debt sales, said Mikael Ericson, senior executive vice president in charge of large corporate accounts.
“We’ll see things speed up in the next two to three years,” Ericson said in an interview. “It’s obvious that we’ll see a trend where European, Nordic and Danish corporate clients will use more capital market funding.”
Investors are watching the development with interest. PFA, Denmark’s second-biggest pension fund with $55 billion in assets, may step up its corporate bond purchases, said Jesper Langmack, who heads the fund’s capital management unit.
“We have a benchmark for the minimum transaction size we’d like to get involved in, but if the yield compensates the liquidity risk on small issues, we have no problem going off benchmark,” Langmack said in an interview. “We look at everything and if the risk-return is attractive, we invest.”
PFA started investing in corporate bonds in 2008 and has since doubled its holding in the securities to 40 billion kroner ($7.2 billion) at the end of 2011, Langmack said.
“If this market takes off in Denmark we would definitely be willing to buy more,” he said.
‘Times Are Changing’
Denmark had a total of $3.4 billion in corporate debt sales last year, Bloomberg data show. That compares with $12.8 billion in Sweden and $11.7 billion in Norway. Danish issuers last year included the country’s biggest phone company TDC A/S. The average deal size in Denmark was 10 times that of issues in Norway, the data show.
At J. Lauritzen A/S, a privately-owned shipping company based in Copenhagen, management has turned to Norway’s debt market to sell its bonds.
Denmark’s corporate debt market “needs to build,” Birgit Aagaard-Svendsen, executive vice president and chief financial officer at Lauritzen, said in an interview. “Times are changing and new rules related to banks may mean that we have to further develop alternative funding means that we do not have in Denmark these days.”
Rockwool A/S (ROCKA), which produces stone wool for insulation and has a market capitalization of about 12.4 billion kroner, says many Danish firms have stopped relying on bank capital.
“After the banking crisis, a lot of Danish companies, us included, are trying to survive without using the banks too much,” Jens Krogsgaard, vice president of group finance, said in an interview. “Banks want to get rid of big loans.”
The Basel Committee on Banking Supervision has set a 7 percent core Tier 1 capital requirement by 2019, while the European Union has a 9 percent target for this year. In the Nordic region, regulators have signaled banks need to meet even stricter standards. Denmark’s Financial Supervisory Authority also requires banks to publish their individual solvency targets and conducts stealth audits to keep lenders in check.
The Confederation of Industry, which argues the FSA’s approach is exacerbating Denmark’s credit crunch, is also exploring options to help fund Denmark’s SMEs.
“The objective is to find alternative ways for especially the SMEs to get financing other than going to the banks,” Kent Damsgaard, director of the confederation’s business and economics department, said in an interview. “We’d prefer something market-based. The last solution is to use public money.”
ABG’s readiness to underwrite debt for small issuers may not mop up all the funding needs of Danish SMEs, Lindquist said.
“We’re targeting companies that are already known,” he said. That will help “to open up the Danish market” he said.