Investors Ditch Ratings for Returns in Bond Boom: Nordic Credit

Norway is about to share its European dominance in unrated bonds with the rest of the Nordic region.

Issuance of bonds ignored by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings has surged in Sweden and Finland. Many of the companies selling, such as Skanska AB and Finnair Oyj, are finding the lack of a credit rating is no impediment to attracting more local buyers.

According to a July report by Fitch, issuers based in northern Europe’s AAA nations have led sales of unrated debt, tapping investor demand for higher yield from stable economies. The European market for unrated bonds grew by 108 billion euros ($144 billion) from 2010 to 2012, according to Fitch. Norway’s 91 unrated issuers was the highest total in Europe, Sweden ranked fifth with 38 and Finland seventh with 28 issuers.

“Bank deleveraging and investors’ need for returns could see Sweden’s unrated bond market expand from about 20 billion kronor to 40 billion kronor by the end of next year,” said Jonas Strom, head of debt capital markets at ABG Sundal Collier. “It will also require corporates having enough confidence to go to the market for growth capital, not just refinancing.”

Capital Effect

Bonds made up 55 percent of debt financing at Scandinavian companies last year and 52 percent in the first half of 2013, according to SEB AB. That compares with 18 percent in 2011. The shift follows stricter bank requirements, with Sweden enforcing some of the world’s toughest capital rules.

Sweden’s status as a haven has driven down borrowing costs, attracting companies that once viewed bond financing as accessible only to the largest companies such as Volvo AB and Electrolux AB.

ICA Gruppen AB, a grocery chain owner, in June sold the biggest ever unrated issue in Sweden, raising 5 billion kronor in bonds. The company’s decision not to apply for a credit rating hasn’t hampered its efforts to obtain debt financing, Stein-Petter Ski, a senior vice president at Solna-based ICA, said in an interview.

“We chose bond funding over bank financing because of favorable terms that didn’t require security and restrictive lending covenants, in combination with a material price saving for the company that amounted to 70-90 basis points,” he said.

Exceeding Bets

Stefan Ericson, a portfolio manager at Carnegie Fonder AB in Stockholm, which oversees 13 billion kronor, said the market for unrated bonds is expanding faster than anticipated as Sweden takes its lead from Norway.

Norwegian issuers have long eschewed official ratings, relying instead on shadow ratings from banks and investors’ own analysis. Carnegie’s Ericson said that as a bond buyer it’s now usually possible to get data and forecasts from equity analysis. Most banks in Sweden have now also merged their equity and credit analysts, he said.

The main risk from a lack of official ratings for bondholders is lower liquidity in the secondary market, Ericson said.

“This should be compensated by a higher coupon,” he said.

According to Fitch’s report, the share of unrated bonds has stayed level at about 10 percent of the total European corporate market over the past three years. This share may not rise much more because many institutional investors have limits on how much unrated debt they can hold, Fitch said.

Yet for issuers like ICA, there’s no plan to limit unrated debt sales. Its latest issue attracted about 70 different buyers, all from the Nordic region, according to Ski.

“Investors are increasingly comfortable with unrated debt issuers if, like ICA Gruppen, it’s listed on the stock market and hence already known,” said Ski.