Norway’s Junk Bond Market Faces Second Wave of Restructuring

Norway’s battered junk bond market, which is showing signs life, could be facing another smack-down.

The 4 billion-krone ($480 million) bond and bank debt restructuring proposed last week by REM Offshore raised eyebrows even among the hardened crowd of the Norwegian junk bond market. The supply boat company revealed an unusually pessimistic outlook: presenting a scenario where its entire fleet could be idle until 2020.

“The Rem Offshore restructuring proposal appears to be a long-term solution for the company, more so than what we have seen with several other companies so far,” said Magnus Vie Sundal, a credit strategist at DNB Markets.

With the price of oil picking up 75 percent this year, the DNB Norwegian junk bond index rallied 9 percent from a low in March amid optimist the market could have turned the corner. Bond issuance also came back to life in June, with new bonds from Color Group, GasLog Ltd., ML 33 Holdings Pioneer Public Properties, Scan Bidco and Stena Metall, according to Nordea Bank.

Yet default rates in the market are running at about 12.1 percent from 5.1 percent at the end of last year and with a second round of restructurings things could get worse yet. So far, 17.1 billion kroner in bonds have defaulted this year.

“This is the million dollar question that every shipowner is asking himself,” said Lars Kirkeby, chief analyst at Nordea in Oslo. “All restructuring cases that have been executed so far rely on an upturn in the market, without a change for the better there will most likely be a second round.”

DNB continues to keep a negative outlook on high yield bonds issued by oil service companies. Global offshore investment is expected to fall by 21 percent in 2016 as oil majors seek to balance capital spending and dividends with their operating cash flows, according to DNB. In addition, the drilling and offshore support markets will continue to remain oversupplied.

According to Paal Ringholm, chief analyst at Swedbank, the current situation in the  “steel,” or shipping and rig market, is exceptionally bad. While frequent re-certifications in the rig market will cool a capacity overhang, this mechanism is not present in the offshore support segment, he said.

"We do expect a second round of restructuring going forward, although with certain nuances,” he said. “If banks continue to provide significant debt deferrals over the next couple of years, then the banking sector only contributes to a delay in the necessary market consolidation. It’s going to take longer than many think to re-balance the market.”

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