Norway Tests Appetite for Bonds After Eksportfinans Demise

Norway's Prime Minister Jens Stoltenberg
Prime Minister Jens Stoltenberg said Nov. 18 Eksportfinans will be dismantled after rejecting the lender’s plea to dodge capital rules limiting loans to single industries. Photographer: Tomm W. Christiansen/Bloomberg

Norway is planning to step up its issuance of government bonds after disrupting credit markets as far as Japan with an uncoordinated decision last month to wind down state-backed Eksportfinans ASA.

The government wants to find an extra 40 billion kroner ($6.9 billion) next year to fund direct loans to exporters, after deciding last month to wind down Eksportfinans, according to a Dec. 2 proposal. That’s on top of planned bond sales of 22 billion kroner. Prime Minister Jens Stoltenberg said Nov. 18 Eksportfinans will be dismantled after rejecting the lender’s plea to dodge capital rules limiting loans to single industries.

Owners of Eksportfinans’ $35 billion in outstanding bonds have since watched their holdings sink as Moody’s Investors Service cut the lender seven steps to junk and Standard & Poor’s followed with a five-level downgrade. According to S&P, Eksportfinans’ euro medium-term note program may already be in default. Still, the government’s plan could make export finance cheaper and even reduce AAA rated Norway’s borrowing costs as it floods its debt market with liquidity sought by investors.

“Perversely, if Norway came to the market, as it does now with a relatively solid fiscal base, and issues a bit more debt, I think you can see that as a positive,” said Gregor MacIntosh, who helps oversee $37 billion as head of rates at Lombard Odier Investment Managers in Geneva. “From a strategic perspective it makes good sense to invest.”

Emulating Sweden

Norway’s average daily turnover in government bonds, excluding repo transactions, is 1.2 billion kroner ($209 million). That compares with about 17.3 billion kronor ($2.6 billion) in neighboring Sweden, according to data provided by Nasdaq OMX and Bloomberg calculations.

The yield on Norway’s 10-year note gained one basis point today to 2.49 percent as of 10:54 a.m. in Oslo. The difference between Norway’s 10-year borrowing costs and yields on similar-maturity German bunds narrowed two basis points to 19.

“I’m pretty sure if we have a very liquid market, for example like Sweden, the yield in Norway would be much lower,” said Leif Inge Christensen, senior dealer in Oslo at Danske Bank A/S. “Sweden’s 10-year issue is yielding way below Norway. That wouldn’t be the case if we had the same liquidity.”

Bigger bond sales by the world’s second-richest nation per capita, which boasts a $560 billion sovereign-wealth fund and no net debt, may offer refuge for investors seeking an escape from the euro crisis. Some buyers have so far hesitated to commit to Norway’s 204 billion-krone bond market because of a lack of liquidity, Danske’s Christensen said.

Diversifying Risk

“Everybody wants to have the possibility to diversify the risk these days and Norway is the most obvious candidate in the world, I presume,” he said. “There is no better credit risk out there. So the reason they don’t buy even more is that it is so hard to get big sizes and it’s hard to turn around. If you get better liquidity it would be even a better market for them to diversify their currency reserves.”

The yield on 10-year notes issued by AAA rated Sweden, the largest Nordic economy with a 540 billion-krona bond market, was 1.78 percent today, or about 48 basis points less than similar-maturity German bunds.

Norway’s broad market bond index has returned 8.5 percent this year, when including reinvested interest, while Swedish debt with a maturity of more than one year has given investors returns of 12.1 percent, Bloomberg indexes show. Danish bonds are up 11.6 percent, according to the indexes.

Bond Demand

Sweden, where the European Commission estimates government debt will fall to 36.3 percent of gross domestic product this year, boasts the world’s best-performing bond market for maturities of 10 years or longer.

Sweden is taking advantage of the demand for its bonds by boosting issuance and plans to sell more 30-year debt to lock in record-low borrowing costs. Sweden’s 10-year note yielded 67 basis points less than German bunds with a similar maturity on Nov. 25, its best discount ever. It costs Sweden about 50 basis points less to borrow for 30 years than it does Germany.

Sigurd Klakeg, deputy director general at the Norwegian Finance Ministry, said it’s still unclear how much debt the country will issue next year and that it doesn’t have the same “refinancing risk” focus as Sweden.

Default Risk

Norway will provide loans to exporters on similar terms to those available at Eksportfinans, Trade and Industry Minister Trond Giske said in a Nov. 30 interview.

“There’s no possibility of subsidizing a new institution,” Giske said. “But of course the Norwegian government has a very good rating and so a state-owned bank would probably get the best rating of all banks.”

The government is in no position to decide whether Eksportfinans will default on its obligations, Giske told reporters in Oslo today.

The government decided to announce its plan to wind down the unit without consulting its other owners because “we had to inform all actors at the same time to ensure the field of competition being just,” he said. “I don’t think they were surprised.”

Norway, the world’s seventh-largest oil exporter, has been shielded from the worst of the debt crisis and boasts budget surpluses and unemployment below 3 percent. Norway is “better placed” than most in Europe to weather the euro area’s debt turmoil, the International Monetary Fund said in a report last month. The country’s mainland economy, which excludes oil and shipping income, will expand about 2.5 percent in 2011 and 2012, the IMF said on Nov. 22.

The country’s debt issuance “really depends on the market situation,” Klakeg said in an interview. “We have very good flexibility to choose between drawing on our fairly substantial cash reserves, the short-term market and the longer-dated bond market. And what alternative we will go for is, of course, impossible to say at this stage.”

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