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European borrowers are flocking to the Nordic region to sell their junk-rated bonds, as issuers shut out of other western credit markets plump for a jurisdiction with a reputation for looser investor protections and lighter disclosures.
Borrowing by high-yield companies, often with no obvious connection to the region, using bonds issued under Norwegian, Swedish or Danish law is on track to hit a record level. It had reached about €15bn this year as of early September, compared with the €18.1bn for the whole of 2021.
Despite strong investor demand for junk debt, several European banks remain unwilling to underwrite the most speculative credits. As a result, some companies are instead turning to Nordic investment banks such as Pareto Securities — which describes itself as “the Nordic Gateway” — to organise their bond deals. The Norway-based bank accounts for about 30 per cent of the region’s junk deals.
“The high-yield market is super well bid at the moment, so deals are getting racier and racier,” said one high-yield bond investor. “Some of these racy deals, traditional underwriters aren’t willing to do, so the Paretos of the world do them, which is helping the Nordic market.”
Pareto said that increasing activity in the market “is facilitated by an established track record of solid performance and low default rates, coupled with recognised legal documentation supporting the transactions”.
It added that the “long-term default rate” in the region “is in line with other high-yield markets globally”.
The Nordic region’s surge in issuance this year comes as borrowers rush to take advantage of rampant demand among global investors for risky debt. With many investors looking for new ways to deploy capital as they shift allocations away from the US, the yield premium for junk European issuers over government debt has fallen to its lowest level since 2018.
The Nordic market has long had a reputation as a place where riskier companies — often small and esoteric issuers — can find willing buyers of their bonds. This reputation as the wild west of European credit grew after several companies successfully placed bonds in 2018 during a period of negative Eurozone interest rates, only to default shortly afterwards.
As the market has grown, its investor base has shifted from being dominated by local asset managers and family offices to a playground for Wall Street and London hedge funds.
One reason issuers flock to the market is that “they have to provide less documentation for investors [because] the requirements there are lighter than in Europe”, said Tapio Jokisaari, a portfolio manager at Finnish credit manager Aktia Asset Management, referring to requirements by investors and investment banks that organise the deals. The documents provided to credit investors are typically shorter and include less information than is common in the rest of Europe.
The market’s history of being a home for smaller and unrated credits meant that its “smaller investor community” was more comfortable with companies not having a rating, Jokisaari added.
Unrated issuers such as Oaktree-backed luxury cruise line The Ritz-Carlton Yacht Collection, which “combines the residential feel of Ritz-Carlton hotels with the freedom of yachting”, and Malta-based private jet charter company AirX Group are among the companies that have issued large bonds in the region.
The cruise line issued $300mn of bonds with an interest rate of almost 12 per cent in the second half of last year through Norway’s DNB Bank and Pareto. The bonds sank from par to about 70 cents on the dollar earlier this year after the company told investors it needed hundreds of millions of dollars in support for activities such as marketing. They have rebounded over the past few months to about 86 cents. Oaktree declined to comment. DNB did not respond to a request for comment.
AirX raised €115mn in September in order to expand its fleet, which consists of 20 large-cabin jets. The deal was organised and marketed by Norway-based Arctic Securities. AirX did not respond to a request for comment.
“While the framework differs from other jurisdictions, it is a well-established and well-functioning market that has provided efficient access to funding for a broad range of companies, with proper requirements for documentation, due diligence and transparency,” said Arctic.
“There is no evidence that there is a higher rate of misconduct in the Nordics, and default rates have been in line with international high-yield markets for the past five years,” it added.
Meanwhile, KKR-owned butter-substitute maker Flora became the first triple C-rated issuer — one of the lowest bands in the credit spectrum — in almost a year when it priced €400mn of unsecured debt with Pareto and Arctic Securities at an interest rate of 8.625 per cent in June. The debt, branded by multiple credit investors as one of the most aggressive deals of the year, has fallen from par to about 90 cents on the euro. KKR did not respond to a request for comment.
“Sponsors [private equity owners] like to use it [the market] because it’s light touch,” said a high-yield bond portfolio manager at a large European asset manager, although they added that this also meant that investors could quickly find themselves facing steep losses.
One of the region’s most well-known credit market fiascos occurred the last time that European spreads were this tight, in 2018, when investors were again chasing higher returns. Lebara Group’s €350mn of junk bonds plummeted after the Netherlands-based mobile operator failed to provide investors with full financial information. The private family office that used the bond proceeds to finance its acquisition of Lebara restated its own accounts numerous times over the following months.
After issuing a €50mn Swedish-law bond as “a bridge to an envisaged IPO” in 2018, again via Pareto, Iceland’s Wow Air breached its agreed debt-to-earnings ratio limit two weeks later, and then defaulted six months after that.
Even companies outside Europe are looking to the Nordic region. In September, MM Proton I, a Massachusetts-based manufacturer of building products, turned to Arctic Securities to price a dollar-denominated bond worth $245mn, at a coupon of 9.875 per cent. MM Proton I did not respond to a request for comment.
