Nordic High Yield
28.08.19
Insights

The Nordic high yield market – H1 2019 review

Jérôme GUILBAUD

High Nordic high yield primary activity After record years in 2017 and 2018, the primary activity in the Nordic High Yield market remained strong in the first half of 2019. The Communication sector was one of the most active, including a NOK 7 billion issue from the telecom company Nokia Oyj. Real estate also stood among the bigger contributors, followed by industrials and financials.

 

As a matter of fact, the Nordic High Yield market has become more and more diversified. A wide variety of Nordic companies now issue debt in this space: telecom & IT companies, industrial companies, insurance companies, fishery companies and real estate companies were all active. Investors are particularly interested in debt issuers from new sectors. Indeed, the increased diversity in terms of country, sector and issuer is very positive for the market as it provides us with an increasingly diversified pool of Nordic companies to invest in.

The nominal outstanding market as of end June 2019 represents around NOK 460 billion (around EUR 47.5 billion), with a Norwegian market share accounting for around 61% vs 95% in 2007 (see Graph 1). The oil and gas sectors now only account for some ten percent of the issuance year to date. While the market share of the oil and gas sector has been decreasing over the past years, the real estate has at the same time increased. Both represent today around 20% of the market share as illustrated in Graph 2 below.

Graph 1: Issuance volume split by year and country including market share evolution for Norway and Sweden

Insight 2019 08 - NHY H1 Review Graph 2

Source: Nordic Trustee as of June 30th, 2019. We have excluded non-Nordic ISINs and perpetual bonds.

 

Graph 2: Issuance volume split by year and sector including market share evolution in oil & gas and real estate

Insight 2019 08 - NHY H1 Review Graph 1

 

Source: Nordic Trustee as of June 30th, 2019. We have excluded non-Nordic ISINs and perpetual bonds.

 

Nordic high yield spread resilience compared to European and US high yield spreads

The start of the year was market by the spread tightening following the spread widening during the latter part of 2018. From April onwards, turbulences in financial markets globally led to spread widening in the European and American High Yield markets. This also happened in the Nordic High Yield market, but to a lesser extent.

The Nordic High Yield market is dominated by local investors, which is one reason explaining why it is less correlated with global financial markets. Thereby, this market is less impacted by general market movements than the European or the American High Yield markets. The Nordic High Yield in local currency is not part of the European or global High Yield indexes. In practice, when a shock arises in global financial markets, the direct impact of international fund flows can be very small as the Nordic High Yield bonds are not important in the international portfolios if at all.

If shocks are relatively short term, international spreads movements can be self-correcting and converge back to their fair values, without significant impacts on Nordic High Yield spreads. Shocks can last for longer time, increasing the probability of having impact on the local Nordic Market.

Graph 3 hereunder compares the spread development in American, European and Norwegian high Yield in the first half of 2019.

The reason for spread changes is also very important. The shorter modified duration and credit duration makes the Nordic High Yield market less sensitive to general yield and in risk appetite changes.

 

Graph 3: Spread evolution in basis point for a 5 years maturity bond rated “B+” over H1 2019

Insight 2019 08 - NHY H1 Review Graph 3

Source: Sparebank 1 markets as of June 30th, 2019.

 

Outlook – External factors expected to provide momentum

Political uncertainty globally plays in favour of the Nordics; at least historically, we have seen this. Trade tensions between the U.S. and China have been the main topic for some time, creating uncertainty around global growth. Concerns about a no deal Brexit rose once again after the election of Boris Johnson as new UK prime minister.

While the European Central bank kept its interest rates unchanged at the monetary policy meeting in July, an extension of its Quantitative Easing program is now being considered. The American Central bank cut its interest rate as well at the monetary policy meeting end of July. This environment drives yields down and has even now reached an oxymoron: negatively yielding high-yield bonds (2% of the euro high-yield universe according to Bank of America Merrill Lynch). In the Nordics, the Norwegian economy is doing well, the Norwegian Central bank already hiked rates two times in 2019 and it is expected to raise it again in September. In Sweden, several years of very strong growth are now under normalisation. Inflation expectations are lowered by lower consumption and lower investment, but GDP growth expectations for 2019 and 2020 remain high from an international perspective.

We expect the development of the Nordic High Yield market in the coming months to be positive. Historical developments suggest a seasonal slowdown during the summer followed by a rebound in activity. However, issuers are more reluctant to issue bonds in a turbulent macro-economic environment. The higher volatility in 2019 has increased the cost of funding for high yield bonds issuers. We would expect issuers to return to the market when the visibility is a little better and when they can achieve competitive pricing on their funding. The secondary market is expected to be relatively active, based on the increased volatility and the general increase in market size over the previous years. A bit less activity in the primary market usually means increased focus on, and activity in, the secondary market. We believe the spread widening seen over the past month will be reversed during the fall, but that the volatility in spreads will be higher.

The running yield in the Nordic High Yield market can be interesting for investors looking for yield as the spreads offer a premium versus European and American High Yield, particularly in Nordic “single-B” quality companies.

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