Norway’s biggest bank is warning investors not to underestimate the risks lurking in Scandinavia’s largest junk bond market.
Magnus Piene, DNB ASA (DNB)’s global head of offshore, says surplus liquidity flowing into Western Europe’s biggest oil producer may lead to a repeat of the spate of defaults Norway saw at the height of the financial crisis in 2009.
“I see early signs of this coming up again and it’s merely a function of excess liquidity,” Piene said in an interview in Oslo. “Instead of putting money into a bank with poor-yielding deposits, you put them into these high risk projects that you may consider low risk -- wrongly in some cases, I would say. All that liquidity is pushing people to do things they shouldn’t be doing.”
Norway’s stable AAA credit rating has drawn investors trying to escape the debt crisis in southern Europe. After piling into government bonds, those investors are now tapping unprecedented central bank liquidity to seek out the best returns inside an economy that credit default swaps suggest is the world’s safest.
Norway relies on the high-yield market to finance its offshore industry, where companies use bond proceeds to pay for oilrigs and ships. Corporate debt issuance this year is already at 54 billion kroner ($9.3 billion), on pace to top last year’s record 96 billion kroner, according to Nordea Bank AB. (NDA) Junk bonds make up about half Norway’s corporate debt sales, the bank estimates.
Piene says the build-up in issuance bears some resemblance to the credit climate in 2007, when easy access to liquidity helped finance projects that wouldn’t have survived during a normal economic cycle. Default rates on Norwegian bonds surged to 15 percent in 2009, compared with today’s 12-month trailing rate of 1.3 percent, according to Nordea.
Yet concern a bubble may be developing has caused some investors to pause. DNB’s Norwegian High-Yield Total Return Index has lost 1 percent since hitting a record last month. Its year-to-date return is 3.9 percent, compared with a loss of 0.2 percent for Norwegian government debt with maturities of more than one year, as measured by a Bloomberg/EFFAS indexes.
Some of the largest issuers this year include billionaire Kjell Inge Roekke’s Aker ASA (AKER), which has raised 2 billion kroner in bonds, adding to 2.6 billion kroner last year. Seadrill Ltd. (SDRL), the oilrig company controlled by billionaire John Fredriksen, in March sold a 1.8 billion-krone bond, after raising $2 billion in dollar-denominated debt and a 1.25 billion-krone issue in 2012.
Non-Norwegian companies are also flocking to the market to tap local investor demand. Singapore-based Oro Negro Drilling Pte, London-based Igas Energy Plc (IGAS) and Sterling Resources Ltd. (SLG) have all issued dollar-denominated bonds in Norway.
“The Norwegian bond market is just a hub for capital distribution,” Piene said last week. “People are coming here to raise money for adventurous projects and hopefully those ventures are stronger than some of the ventures we saw in 2007.”
Credit indexes signal the market may be cooling after a “significant spread tightening,” Paal Vammervold, chief origination manager at Nordea Bank in Oslo, said last week. “We see credit indexes widening somewhat and that’s at least a signal that investors aren’t willing to buy everything at any kind of yield.”
According to Vammervold, it would be wrong to compare this boom in financing with what happened in 2006 and 2007, in part since more of the projects now have contracts. “Clearly based on the issuance that we see now that’s very different this time around so we feel that the market is more sound,” he said.
Knut Eivind Haaland, a senior vice president who arranges bond sales at DNB, also said bankers and investors have learned their lesson. In 2008 to 2009, about 40 percent to 50 percent of Norway’s junk bonds went into some sort of default, restructuring or covenant breach, he said.
“The market is extremely hot, there’s a lot of liquidity out there,” he said. “But generally structures on bonds are of better quality.”
On the other side of the financing table, where banks make loans to companies rather than help arrange bond sales, bankers are questioning whether there’s a bubble forming or whether the market will continue to develop into a long-term source of financing.
“The interesting question is to whom is the Norwegian kroner bond market not open?” Luc Vrettos, a director of global banking at Citigroup, said at a conference in Oslo last week. “Who can’t go there? One guy with one asset? Perhaps not.”
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