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Vulture Funds Swoop as Norway's Junk Bonds Hit Distressed Levels

  • Norwegian companies now face a different type of investor
  • Nordea says most supply companies need to restructure debt

Vulture funds have discovered Norway.

Distressed debt investors are now targeting the high-yield market of western Europe’s largest oil producer to sift through collapsed bond prices, according to Lars Kirkeby, chief credit analyst at Nordea Markets, a unit of Scandinavia’s biggest bank.

There are “many distressed funds right now that are looking at rig and supply companies,” he said in an interview on Monday.

With Brent crude prices down more than 70 percent since mid-2014, several Norwegian oil services companies have become unprofitable. The development has changed the landscape. Vulture funds tend only to enter markets facing multiple bankruptcies, hoping to pick up high-yielding securities at bargain prices.

Norway has already seen Blackstone Group LP’s GSO Capital Partners vying with other bondholders for control over a restructuring of paper maker Norske Skog’s debt. U.S distressed funds often have the experience, capital and know-how to take over companies, Kirkeby said. Norwegian issuers aren’t used to “very active distressed funds that have muscle,” he said.

Junk bond issuers in Norway’s oil-related sector will struggle to sell new debt this year, while investors will be occupied with restructurings, Kirkeby said.

“A lot of the companies that have maturities next year will start looking at that this year as they’ll break covenants,” he said. Most of the supply companies will probably “be restructured, and gradually also most of the rig companies.”

Among companies that have already sought restructuring are seismic Polarcus Ltd. and Havila Shipping ASA.

Seadrill Ltd., the offshore driller controlled by billionaire John Fredriksen, has seen its share price plunge about 45 percent this year, while its 2017 bond traded at about 34 cents on the dollar on Monday. Bank of America Merrill Lynch downgraded the company this month, saying it was “increasingly concerned” about balance sheet gearing.

A Seadrill spokesman didn’t respond to an e-mail and phone calls seeking comment.

The driller has about $2.7 billion in unsecured bonds outstanding, according to its third-quarter report. The debt is issued in Norwegian kroner, Swedish kronor and U.S. dollars.

Shadow Rating

Danske Bank A/S cut its shadow corporate rating on Seadrill to B+ from BB- on Monday, while also lowering the driller’s unsecured rating to B- from B+.

“Through the cycle, we still see fleet values having a decent cushion to both secured debt and total debt but a worst-case outcome of forced asset liquidations at the trough could leave limited recovery for the unsecured bonds,” analyst Sondre Dale Stormyr wrote in a note.

Seadrill reversed an earlier loss and rose as much as 1.7 percent in Oslo and was up 1.1 percent as of 1:15 p.m. local time.

“There can be distressed funds that buy bonds now and they will be rather tough to deal with,” Kirkeby said.

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