Time Has Now Come for `Best' Norwegian Junk Bonds to Feel Pain

  • Buying opportunities in non-oil junk debt, Swedbank says
  • High-yield market pricing in more restructures to come

The final blow is about to land on the Norwegian junk bond market.

“We’re hopefully in the last big repricing of the market,” Paal Ringholm, head of credit research at Swedbank AB, said in an interview on Monday. “We’re in a wave where the next best or best are getting a sharp repricing.”

The junk bond market of Western Europe’s largest oil producer has plunged since oil prices started to fall in 2014. The primary market is effectively closed for oil-related issuers as spreads have widened so much that it’s too expensive for companies to issue new debt.

Norwegian Air Shuttle ASA’s 2018 floating-rate notes are bid at a yield-to-maturity of about 7.1 percent while the 2020 bonds of Stolt-Nielsen Ltd., which transports and stores specialty and bulk liquid chemicals, are bid at a yield-to-maturity of 6.9 percent. That compares with about 72 percent for Seadrill Ltd.’s 2018 bond.

“There’s more realism in this wave,” Ringholm said. “It’s pricing in that several companies will restructure and they will -- it hits harder and on all types of credit profiles.”

The market needs one last “big repricing” to convince investors that it’s cheap before it begins to function more normally again, he said. That will pave the way for buyers that are looking to time a bottoming in the market.

“For an investor that can stand some pain short term, it’s getting very interesting to enter,” the Swedbank analyst said.

Vulture funds, private investors and shareholders who see opportunities in company debt in addition to or instead of stock will be the first to take the plunge, but buyers will have to be wary about what they pick up.

“There are some segments that are not repriced yet,” Ringholm said. “The unsecured OSV segment still has room for downside for example.”

The issue now, with crude prices hovering in the $30s, is that none of the companies have a “business model that can endure” that level, according to Ringholm. Even oil at $40 is unsustainable and $50 will also cause restructurings, he said.

While it’s too early to buy oil-related junk bonds, Ringholm sees attractive prices among non-oil high-yield bonds. As portfolio managers need to sell all kinds of bonds due to the need for liquidity, that has led to a “repricing of everything”, he said.

“That offers very good buying opportunities for everything that’s not oil,” he said. “Generally that’s what you should buy and wait a little bit more to buy oil bonds until they’re cheap enough.”

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