Nordic Bond Managers Explore New Way to Set Investment Grade

The European Union’s ban of so-called shadow ratings is making it harder for Nordic bond managers to buy high quality debt.

“When these ratings are gone, we have to find another way to define investment grade,” Jacob Boers Lind, head of Norwegian fixed income at Danske Capital, Danske Bank’s asset management arm, said in an interview in Oslo Thursday.

The European Securities and Markets Authority has decided that only registered rating companies, like Moody’s, S&P and Fitch, can provide ratings. Nordic shadow ratings, or ratings provided by credit analysts at banks, have been a cornerstone of the region’s corporate debt market, allowing smaller companies to issue bonds and reducing issuer costs. 

The Nordic region, which includes Finland, Denmark, Sweden and Norway, has the highest share of unrated bonds in Europe, according to Moody’s.

“It’s a pity,” Boers Lind said. “It has been an important tool in the Norwegian market to provide liquidity for the smaller banks. Many mandates have requirements on investment grade -- when these banks don’t get a rating any more, it’s difficult to define the universe.”

DNB ASA, Norway’s largest bank, decided on Monday to discontinue shadow ratings with immediate effect. Five of the six largest banks in the Nordic region, including Nordea Bank AB, have now chosen to drop shadow ratings. The shift may put liquidity for bonds issued by Norway’s smaller banks at risk.

“If we can’t formulate a mandate that allows us and other funds to trade those banks it will affect liquidity because there aren’t many other investors that buy smaller banks,” Boers Lind said.

Norwegian fund managers are discussing possible solutions within the Fund and Asset Management Association, according to Boers Lind, 43, who manages about 33 billion kroner ($4 billion) and buys senior unsecured bonds from Norwegian banks for his funds.

“Norwegian savings banks are solid, low risk of default,” he said. “You get a good pickup compared to government. It’s enough for the risk plus a liquidity premium.”

More financial regulation has made it more complicated for asset managers to invest in banking debt in particular. It requires more manpower, systems and the customers must pay for it in the end, Boers Lind said.

“Not all regulation is positive,” he said. “Removing shadow ratings does more damage than good.”

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