The Nordic corporate bond market remains one of the last pockets of yield and this market’s unique combination of strong fundamentals and attractive valuation is luring more non-Nordic investors.
While many big Nordic companies are well-known, rated, and active issuers in the investment grade bond market, most companies remain hidden from traditional bond investors. Although most Nordic corporate bond issuers are equity-listed, blue-chip companies and well recognized by equity investors, their colleagues on the other side of the balance sheet haven’t necessarily realized these companies are also corporate bond issuers. The reason might be as simple as a lack of external credit opinion – even if most investors claim they focus on credit fundamentals and quality (which should be based on investors’ own analysis, in my opinion).
One of Europe´s largest markets for unrated issues
Most Central European investors invest only in officially rated corporate bonds. But to access the Nordic market, you should pay attention to unrated bonds since most companies are not rated by any of the major rating agencies. In fact,54% of Nordic issuers don’t have a rating, making the market less straightforward for traditional, rated-only investors – and leaves companies paying more coupon than their rated peers unnoticed, even if the credit fundamentals are better. The Finnish unrated market is the second largest in Europe, just behind France, by number of non-financial issuers, so we are not talking about a small market either. But why, one might ask, are these companies not seeking an official rating? There are multiple reasons that I will discuss below.
Regional funding has always been reliable for Nordic corporates
The Nordic corporate bond market has developed hand in hand with the equity market, at first relying only on local institutional investors – who happen to also be the largest equity investors in the region. As they have been analyzing and investing in these companies for a long time, they have a deep knowledge about them. Since most Nordic companies have remained without a rating while the corporate bond market has developed, most investors don’t have rules or limits based on official credit rating. Thus, most investors are more concerned about the true credit quality of the issuer than just an official credit rating. From the companies’ perspective, this means they have had good access to the corporate bond market, even without a rating, if they have sound credit fundamentals and a credible track record.
Nordic market enjoys good credit research coverage
Despite not having a rating, Nordic companies are well covered by numerous research analysts from big Nordic banks and brokers, offering a strong basis for valuation comparisons. Therefore, there are plenty of external opinions on credit quality available to support investors’ own credit assessments. In fact, many unrated Nordic companies have better research coverage than rated companies. Thus, for investors, there is very little added value from an official rating.
Weighing the benefits of rating implications
When looking at matters from the issuers’ perspective, there are pros and cons to consider when analyzing the benefits from an official rating. One clear benefit from an official rating is that rated companies usually get cheaper funding from the corporate bond markets due to a larger investor base. But the difference in coupon can be lost when taking into account the cost of a rating. Companies typically pay an upfront fee and also an annual maintenance fee to the rating agency. In addition, company management must allocate their time to regular rating agency meetings and the rating agencies demand a lot of reporting material from the company. Therefore, to make an official rating worth the investment, a company should tap the market regularly or issue large amounts of debt. Many Nordic companies are not regular issuers and average issue sizes are typically not large enough to make a rating an economically beneficial investment. If and when a company aims to issue large bonds, it usually needs additional support from Central European investors – and, for many of them, an official rating is a must. Also, as mentioned, with large issue sizes, the money saved in coupon can turn a rating into a good investment.
So what are the implications for investors in the Nordic corporate bond market? High quality companies are offering very attractive yield compared to their credit fundamentals, especially against these companies’ rated peers. While there has been a growing number of Central European investors involved in the Nordic unrated market, there is still a lot of value left on the table.
Read more from our Nordic Corporate Bond White Paper