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Boom time for corporate bonds

With sales hitting 82 billion kroner and falling interest rates, the market looks ahead to a record-setting year

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Sales of Norwegian corporate bonds look set to beat a 2007 record as falling interest rates and an oil boom stoke demand for the higher-yielding securities.

“The market looks very strong,” said Lars Kirkeby, a credit analyst at Nordea Bank AB in Oslo, in October. “I can’t really see that there should be any slowdown in Norway in the near future.”

Seadrill, the world’s biggest oil-rig owner, and billionaire Kjell Inge Roekke’s Aker ASA, have led a surge in debt sales that’s tapped global demand for assets sold out of Europe’s second-largest oil exporter. A 45 per cent increase in North Sea crude prices over the past three years and Norway’s biggest oil finds in four decades have also driven offshore investments to record levels.

High demand

So far this year, 82 billion kroner (about Dh52 billion) in corporate bonds have been sold in Norway, compared with a record 83 billion kroner five years ago just before the onset of the global financial crisis, Nordea estimates. Issuance this year is split evenly among junk bonds and investment grade debt, compared with an 83/17 per cent split in 2007, according to Nordea, which last month helped manage a 700 million-kroner sale for Teekay Corp.

“There is a lot of demand out of continental Europe for Nordic or Norwegian high yield,” says Arne Eidshagen, who helps manage about ¤400 million (about Dh1.8 billion) in high-yield debt at Alfred Berg Asset Management in Oslo. “This trend is a result of the combination of Nordic safe haven and yields measured in whole percentage points in the high-yield market,” he adds.

Recent sales include a 625 million-krone, four-year secured deal from department store operator Steen & Strøm AS, which priced at 140 basis points above the three-month Norwegian interbank offered rate. Ship Finance International in October sold 600 million kroner in five-year debt at 5 percentage points over three-month Nibor, which was fixed at 1.9 per cent on October 19.

Part of the market growth comes from foreign companies seeking willing investors in Norway, which boasts Scandinavia’s biggest corporate bond market. Denmark’s A.P. Møller-Mærsk A/S set a record for Norway with a three billion-krone floating rate offering in March, which priced at 2.1 percentage points more than Nibor.

“We still see a good pipeline with new issuance activity both from regular issuers and certainly also companies that are new to the bond market,” said Jonas Shum, an analyst at Skandinaviska Enskilda Banken AB (SEB) in Oslo. “What’s driving this is that the prices have come down to a level which are more acceptable for companies and that’s very much linked to the iTraxx crossover index because a lot of the Norwegian issuers are high-yield.”

The Markit iTraxx Europe Crossover index, a benchmark measure of credit risk, fell to 460.6 on September 14, the lowest in more than a year, signalling an improvement in credit demand. The index traded at 482 basis points at the end of last week, compared with a high of more than 800 basis points last year and more than 750 basis points earlier this year as Europe’s debt crisis deepened.

Spreads on Norwegian junk bonds have failed to keep pace with the larger rally in debt markets in part because of the surging supply, said Eidshagen. “Spreads have contracted just like you have seen in the global markets, but my impression is that in the domestic Nordic markets the contraction has been less pronounced,” he said. “This goes particularly for the Norwegian high-yield market. One reason for this is the large amount of supply.”

Benchmark rates plunged in September after policymakers from Washington to Frankfurt pledged a new wave of stimulus to generate a recovery. The measures also fed through to Norway, where Nibor last month fell to 1.89 per cent, the lowest in three years. The three-month rate was as high as 2.41 per cent in June.

Interbank rates may soon start to rise after Norway’s central bank signalled it’s preparing to increase its benchmark rate as soon as December, in part to cool credit growth and surging home prices.

Strong economy

Norway, the world’s fourth-richest country per capita, boasts the biggest budget surplus of any AAA-rated nation. It has largely been shielded from the financial crisis thanks to a boom in oil and gas investments, which are estimated to reach a record 185 billion kroner this year and top 200 billion kroner in 2013. That’s filtered through to the rest of the economy — registered unemployment is below 3 per cent.

Norway’s Finance Ministry estimates the economy, excluding income from oil and shipping, will grow 3.7 per cent this year and 2.9 per cent next year, according to the budget released this month. The euro area, by contrast, may contract 0.3 percent, according to European Commission forecasts. The Norwegian government this month also pledged spending a record amount of its oil wealth next year, stimulating growth ahead of next year’s election.

The strong economic fundamentals will keep supporting demand, said SEB’s Shum. “There’s still a good inflow of funds to bond asset managers and as long as the macroeconomic backdrop works in the right direction you will still see a good appetite for bonds,” he said.

— Bloomberg