NIB Gets AAA Boost as Europe Fights Darkest Hour: Nordic Credit
Europe’s recession is helping the Nordic Investment Bank as the lender plans to expand its bond sales to three benchmarks worth a total 5 billion euros ($6.5 billion) next year.
“As long as there is uncertainty in the euro area, there will be a certain flow toward the Nordic region,” Chief Executive Officer Henrik Normann said in an interview at the bank’s headquarters in Helsinki. Europe is “at the darkest hour at the moment, before the reforms start to work,” he said.
The debt crisis and recession riling Europe have sent investors to AAA rated Sweden, Denmark, Norway and Finland in search of bonds deemed safe from the currency bloc’s turmoil. Investor appetite has made its way into higher-yielding debt classes from the region, moving from sovereign and agency notes, such as NIB’s, to mortgage-backed covered bonds and corporate credit.
European policy makers have proposed fiscal coordination and bank supervision to boost confidence in the 17-member euro bloc. Governments are also cutting spending, raising taxes and enacting reforms to fix their economies. Yet the measures have so far failed to end the crisis and persuade investors to turn away from haven markets.
In the Nordic region, which is backed by government debt loads less than half the euro-zone average and current account surpluses, Finland is the only euro member. Denmark pegs its krone to the euro, while Sweden is a European Union member that’s opted to keep its krone in a free float. Norway, like Switzerland, has stayed outside the European Union.
The AAA rated investment bank, backed by Nordic and Baltic governments, is “on track” with its 3.2 billion-euro issuance planned for this year, Normann said. By Sept. 30, the bank had sold about 3 billion euros of debt. Its growing balance sheet and bond redemptions are boosting the funding target in 2013.
“We hope we can issue three benchmarks next year,” Normann said. “We are opportunistic in that if the market is good and there is demand, we may issue a bit ahead of time.”
The bank raised $1.25 billion in a five-year benchmark issue on Jan. 31, narrowing its spread to four basis points over the mid-swap rate, compared with six basis points a year earlier when it last sold a similar-maturity dollar-denominated benchmark. The AAA rated European Investment Bank’s five-year $3.5 billion bond sold Jan. 18 had a spread of 70 basis points over the mid-swap rate.
‘So Few AAA’
“Next year funding costs will still be low because there are so few AAA rated names,” Normann said. “On a relative basis, NIB will do quite well.”
NIB has about 3.6 billion euros of debt maturing next year and 4.1 billion euros in 2014, including interest payments, according to data compiled by Bloomberg. This year, it repaid about 1.1 billion euros. Of NIB’s shareholders, Sweden, Denmark, Norway and Finland represent 95 percent of its share capital.
NIB spends its funds on infrastructure loans, such as the $56.5 million electricity grid expansion of Lyse Energi AS in Norway or the $168 million provided for research in the cement and mineral industries by FLSmidth & Co. A/S in Denmark.
The spread on NIB’s 1 percent 2017 bond to the U.S. Treasury actives curve was at 9 basis points today, compared with a May high of 28 basis points.
The bank hasn’t sold a single bond denominated in euros this year, as it gets lower borrowing costs by issuing dollar- denominated securities and then using the swap market.
“It’s cheaper for us to issue in U.S. dollars and swap back to euros,” Normann said. “We don’t look at arbitrage as such. We look at minimizing our funding cost.”
NIB matches the maturity of its bonds with that of the loans in its portfolio and hasn’t sought to lock in the cheaper rates by selling debt with a longer maturity, said Normann, who also serves on the board of directors of Nasdaq OMX Nordic Ltd. and previously ran Danske Markets’ worldwide operations.
“If we issue a 10-year loan, then we generally issue 10- year bonds,” he said. “We have very few gaps.”
The investment environment isn’t likely to change until economic reforms begin to work and Europe regains competitiveness, Normann said.
“We were lucky it was the Greeks who started the crisis,” he said. “If it had been the Spaniards, it would have been much, much worse. Now it was a relatively small country that could be insulated and you could start a reform process.”
The European Central Bank has already restored some confidence, helping to ease yields by lending the region’s banks more than a trillion euros for three years and pledging to buy sovereign bonds on the secondary market.
“This will be seen as a turning point for the euro,” Normann said. “We will end up sending flowers to the Greeks in two-to-three years’ time.”
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