Norway Junk Bond Investors Set Sight on Attractive Oil Debt

Norway’s junk bond investors see oil debt as an opportunity, provided you’re patient and picky.

Volatility in the global markets has created a liquidity squeeze, with widening spreads for oil-related bonds offering “good payment for the credit risk,” said Roar Tveit, a portfolio manager at Holberg Fondsforvaltning AS.

“We’re rather on the buyer’s side,” he said in an interview in Oslo on Thursday. “Our primary analysis is that we buy companies that will survive this downturn. Some of these companies offer very attractive credit risk premiums right now.”

The Norwegian junk bond market plunged along with oil prices in July, with the DNB High-Yield Norway Total Return Hedged Index falling 8 percent since then. Crude prices have now recovered some, rising around 11 percent from the end of September. But oil bonds have continued to suffer.

Graph of DNB's high-yield index.

“Prices are very attractive at this point in time, ” said Maciej Woznica, chief portfolio manager and head of credit at Sparinvest. “In the last 12 months prices in CCCs have dropped as much as they did in 2008.”

While yields indicate returns of up to 30 percent, it’s very important for investors to “cherry-pick,” said Woznica, who invests in all segments of the junk bond market.

“Those are returns you’re not actually going to realize, plus you’re not going to realize them within one year, which some investors might hope,” Woznica said. “It’s a longer process so you need to be set up in a way to take advantage of it over a longer period of time.”

Investors buying bonds with the widest spreads must be prepared to take a hit as companies may run out of cash. The pricing of CCCs within the supply sector is based on a recovery scenario, according to Woznica.

“We’re happy to take equity,” he said. “We are bond investors, so the idea is to get our money back. But in situations where the return is attractive we will look at those situations as well.”

Tveit prefers to focus on "the best" BB, such as BW Offshore Ltd, Aker ASA and Det Norske Oljeselskap ASA.

“If those premiums will go higher or lower is hard to say in the short term,” he said. “We think that if you invest today and invest with a three-year horizon the current level is interesting.”

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